2Q15 Market: Is A More Normalized Environment On The Horizon? by Francis Gannon, The Royce Funds
After five years of higher-than-usual returns, we believe that U.S. equity results are moving closer to their longer-term averages, that stocks of economically sensitive companies will be rewarded while interest rate sensitive stocks look likely to lag, and that U.S. small-caps offer attractive risk/return profiles given their greater potential for earnings growth and reasonable valuations.
Greek Drama Created Underwhelming Results
The Greek default late in June eroded gains—giving equities second-quarter results that more closely hugged the flat line. The tech-oriented Nasdaq Composite was the leader, up 1.8%, followed by the small-cap Russell 2000, which finished the quarter with a gain of 0.4%. The large-cap S&P 500 and Russell 1000 Indexes rose 0.3% and 0.1%, respectively.
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Nasdaq and Small-Cap Lead the Way
Based on its strong second-quarter showing, the Nasdaq Composite was the year-to-date leader through 6/30/15, up 5.3% versus a 4.8% return for the Russell 2000 and respective gains of 1.2% and 1.7% for the S&P 500 and Russell 1000.
Long-Term Returns in Excess
Both large-cap and small-cap indexes’ three- and five-year average annual total returns for the periods ended 6/30/15 were above 17%, well in excess of each index’s historical average.
What a Difference Five Years Makes
Trailing 1-, 3-, 5-, and 10-Year Average Annual Total Returns Ended 6/30/15 (%)
Higher and Higher…
The four major indexes, S&P 500, Russell 1000, Russell 2000, and NASDAQ Composite, all made new all-time highs in the quarter. Notably for the NASDAQ, this index’s prior all-time high was established 15 years ago in March 2000.
The Cycle Belonged to Small-Cap
Small-caps continued to lead from the 10/13/14 market low, with the Russell 2000 up 20.6% versus respective gains of 11.7% and 12.5% for the S&P 500 and Russell 1000.
Small-Cap Growth Outgrows Value
Within small-cap, the Russell 2000 Growth Index was up 2.0% for the second quarter versus a loss of 1.2% for the Russell 2000 Value Index. Year-to-date through 6/30/15, the advantage was even more dramatic, with the small-cap growth index rising 8.7% versus a gain of 0.8% for small-cap value. Trailing returns for the one-, three-, five-, and 10-year periods all favored small-cap growth while longer-term spans—15, 20, 25, 30, and 35 years saw outperformance by small-cap value.
Healthy and Informed
Health Care and Information Technology were the best performing sectors in the Russell 2000 through 6/30/15, with the first of the two leading by a wide margin, while Utilities and Materials were the worst performers in the year’s first half.
Rising Rates Present No Problem for Equities
Cumulative Performance Beginning 5/2/13 (Treasury Yield Low) Through 6/30/15 (%)
A Global Bull Encounters a Greek Drama
Late in June, equity investors had to address the potential consequences of an economic Greek tragedy. Investors’ concerns about a Greek default stalled what was otherwise a robust recovery in non-U.S. equities. The Russell Global ex-U.S. Small Cap Index returned 3.9% versus a gain of 0.7% for the Russell Global ex-U.S. Large Cap Index for the second quarter. Year-to-date results remained quite solid—the small-cap index led the way, with a gain of 7.7% while the Russell Global ex-U.S. Large Cap Index rose 4.2%.
Micro-Caps Strong While Mid-Caps Stumble
Micro-caps also remained on the upswing, with the Russell Microcap Index up 2.8% during the quarter and 6.0% year-to-date through 6/30/15. Mid-caps, as measured by the Russell Midcap Index, stumbled late in the quarter and fell 1.5%, though they remained in the black year-to-date, up 2.4%.
Royce Funds with Highest Average Annual Total Returns – Five Years Ended 6/30/15 (%)
|Global Financial Services||4.41||7.22||7.05||17.07||8.71|
|Russell 2000 Index||0.42||4.75||6.49||17.08||8.40|
|Russell Global Small Cap Index||2.39||6.37||0.34||11.77||7.36|
|Russell Global ex-U.S. Small Cap Index||3.93||7.74||-3.46||8.99||7.07|
|Russell Europe Small Cap Index||6.19||10.01||-4.56||13.09||7.33|
* Not Annualized