All-Night News Cycle Turns Up Stress on U.S. Megacap Stocks

  • Russell 2000 overnight moves fall below S&P 500 for first time
  • Safe haven in domestic economy shield small-caps from bounces

While the U.S. sleeps, anxiety levels are rising for the biggest U.S. stocks.

Thanks to an almost doubling in volatility from 2014, shares in the Standard & Poor’s 500 Index are swinging more during off hours than their small-cap brethren for the first time in at least 15 years. Data compiled by Credit Suisse Group AG measured the difference in price between when exchanges close at 4 p.m. in New York and reopen the next day at 9:30 a.m.

It’s another example of how global concerns have lashed U.S. investors in 2015, with everything from slowing growth in China and the rising dollar upsetting the historic relationship between small- and large-cap stocks. Bigger international companies, usually perceived as more stable, have become more susceptible to fluctuation than their smaller, less liquid counterparts -- especially when Europe and Asia are open for business.

"It really affects multinational companies who get revenue from abroad," Ana Avramovic, a U.S. strategist at Credit Suisse Group AG, said by phone. "It’s also the fact that the U.S. economy has been doing quite well. If you have smaller companies more exposed to the domestic economy and the domestic economy has been doing well, there’s less concern there with what’s going on abroad."

The S&P 500’s average overnight swing almost doubled in 2015 to 0.44 percent, data from Credit Suisse show. Meanwhile, overnight risk in small caps is about a quarter of what it was seven years ago, with the Russell 2000’s average overnight move at 0.42 percent in 2015, the lowest on record.

The same divergence can be seen in intraday volatility. A gauge for the small-cap index’s volatility repeatedly closed below the VIX following the late summer rout, only the third time that’s happened in 11 years. While the VIX has fallen back below the Russell 2000 volatility index, the off-hours trend hasn’t, as markets track news from China.

"The overnight angle is reflecting China, because a lot of that is what’s happening with their market, and they open after we close," said Peter Jankovskis, who helps oversee $1.9 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments. "Now we’ll see the U.S. market sometimes have more of a rally and stabilize, and then things go pear-shaped in China and you end up with a large disparity in the next day’s open."

Small-cap stocks were behaving as usual for the first half of the year. In March, the Russell 2000 moved 8.8 percent more than the S&P 500 on average during the after-hours period. Things started to reverse after the devaluation of the yuan sent U.S. stocks tumbling. On Aug. 24, the worst day of the subsequent selloff, the S&P 500 opened 6.5 percent below its official close the night before, while the Russell opened 4.9 percent down.

While the average monthly overnight move fell for both indexes in September, the Russell 2000 dropped more dramatically, hovering just under the S&P 500. For this month through Oct. 22, the Russell 2000’s overnight average change is 17 percent less than the S&P 500. That’s a departure from past earnings seasons: the Russell 2000 tends to be more volatile as it moves based on company-specific news, Jankovskis said.

"Normally heading into earnings you would not expect it, but that’s the unusual environment we find ourselves in," Jankovskis said. "The bottom line is to be aware of where your revenue exposures are in the companies you’re buying."

Even though the relationship has shifted, both benchmarks’ overnight moves are lower than previous market routs. In 2011, when U.S. stocks saw a similar selloff, the S&P 500’s average off-hours swing was 0.63 percent, versus the Russell 2000’s 1.16 percent. Still, 2015’s volatility reversal may suggests small-caps warrant a closer look.

"Overnight risk for the S&P and the Russell 2000 is comparable," Avramovic said. "If you can realize greater impact cost savings in the Russell and overnight risk is the same, then there is more of an argument to accept the risk for the Russell."

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