It's August Again for Small Caps as Russell Tumbles to Year Low

  • Russell 2000 first among benchmark indexes to make new lows
  • An index of small-cap biotech shares plummets 7.7 percent

For small-cap stocks in the U.S., particularly those associated with health care, the vortex has opened again.

Dragged lower by selling that also sent biotechnology stocks to the worst rout since 2011, the Russell 2000 Index of smaller companies sank 2.8 percent as of 3 p.m. in New York, poised to pierce through the August floor that marked the bottom of its first 10 percent decline in four years. Health-care companies in the gauge fell 6.4 percent, erasing their 2015 gain.

Smaller companies are bearing the brunt of the selling as renewed concern over global economic growth prompts investors to exit the best performers. While Russell 2000 stocks were favored earlier in the year on speculation they’re insulated from international markets, now their valuations are catching up to them.

“People are re-assessing risk,” Malcolm Polley, who oversees $1.4 billion as president and chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania, said by phone. “Higher-risk items are more exposed when you get a decline in the market. Small-caps tend to underperform simply because they have a longer way to get P/E ratios to a modest level.”

Down seven days in a row, the Russell 2000 is poised for the longest streak of decline since 2011. After falling 7.6 percent over the stretch, the index has undercut its August low of 1,104.10 and trades at 34.5 times reported earnings. The S&P 500 has lost 5.4 percent over the stretch, with a P/E ratio of 16.6.

The combination of smaller companies and biotechnology was proving even worse. An index tracking 170 such stocks compiled by Wells Fargo slumped 7.7 percent after plunging 7.6 percent on Friday, the biggest two-day decline since 2008. Seven stocks in the 165-member Russell 2000 Biotechnology Index were down more than 20 percent today alone.

The desire to avoid smaller, riskier stocks has also pushed a version of the S&P 500 that strips out market-cap bias to its August low. While the benchmark measure is still 0.7 percent above the nadir, the S&P 500 Equal Weight Index fell beneath its worst level from August.

It’s a reversal from the earlier part of the year, when smaller companies were sought as the shelter of the global turmoil. At its peak in June, the Russell 200 was up 7.6 percent in 2015, more than double the gain in the S&P 500.

After reaching its lowest level on Aug. 25 at the same time with three other benchmark indexes, the Russell 2000 is the first to revisit the bottom. The Dow Jones Industrial Average has fared the best, holding 2 percent above the August low, while the Nasdaq Composite Index is 0.8 percent away.

“In these kinds of sharp selloffs, people tend to indiscriminately sell and that tends to hurt small-caps,” said Brian Jacobsen, who helps oversee $250 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “It’s a high-beta play for the rest of the market, so when there’s a pick-up in volatility, I’d ordinarily expect that more of the carnage will be in the Russell 2000 space.”

Before it's here, it's on the Bloomberg Terminal.