Small caps outperform after recessions, so ‘you have history on your side,’ money manager says

Small caps just had a big week.

The Russell 2000 index climbed almost 8% last week as the health-care-heavy group caught a bounce from positive news on the biotech front regarding a possible coronavirus vaccine. The S&P 500 rose just over 3% in the same time frame.

And the group’s exposure to the health-care space isn’t its only potential catalyst in this market, Michael Binger, president of money management firm Gradient Investments, told CNBC’s “Trading Nation” on Friday.

“When you look historically, as the economy comes out of a recession — and we’re certainly going to be in a recession after the second quarter — small caps have outperformed large caps in nine out of the last 10 economic downturns coming out of those downturns,” Binger said. “So, I think you have history on your side.”

Small caps also tend to be more U.S.-centric than their larger counterparts, said Binger, who plays the group via the SPDR Portfolio S&P 600 Small Cap ETF (SPSM), a fund that tracks companies worth about $450 million to $2.1 billion.

For comparison, the Russell 2000 index, tracked by the iShares Russell 2000 ETF (IWM), is composed of companies with market caps of $150 million to $5 billion.

“You don’t have to worry about rising tensions in China, where the dollar’s going to go,” Binger said. “And, frankly, they’re just a lot cheaper than their large-cap brethren.”

Craig Johnson, senior technical research analyst at Piper Sandler, struck a more cautious tone.

“What I’m seeing with this IWM chart is we’re running up into some resistance around 135,” he said in the same interview. “The key thing that we’re going to ultimately have to see with the IWM is we’re going to have to start to see the financials participate.”

As the IWM starts to undergo some “bullish consolidation,” financials, which account for 20% of the small caps, will have to participate for the gains to last, Johnson said.

“I made a quick ratio chart looking at the KRE divided by the S&P 500, and there is some small evidence you’re trying to make a double bottom down there, but at this point in time, I don’t think there’s enough evidence,” he said, pointing to the bottom panel of his chart.

“Small- and mid-cap stocks have underperformed for a while. Nice little catch-up this week, but you need more evidence, more time, to make a bigger, broader call for investors at this point,” he said Friday.

The Russell 2000 and IWM are down nearly 19% year to date. The S&P is down almost 9%.

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