By: Rolf Agather, Managing Director, North America Research
I was fortunate to join an all star panel of experts at our recent FTSE Russell Small Cap Summit, held with the news media at our New York office. For our third annual Summit, we orchestrated a lively panel discussion moderated by Reuters’ markets correspondent Chuck Mikolajczak.
US small cap market volatility was clearly top-of-mind for our panelists and attendees and our experts helped put recent market concerns about volatility into perspective. Heidi Richardson, Head of Investment Strategy for the U.S. at BlackRock iShares, set the stage, describing the first quarter as a “tale of two halves.” By this she referred to the remarkable global market recovery, particularly in US small cap equities, from February 11th through quarter-end, fueled by a more dovish turn by the US Federal Reserve among other factors. Heidi was quick to make the point that while markets may well continue to be volatile for the foreseeable future, US small caps may do better in this environment.
All the talk of market volatility naturally led on to related views from panelist Russell Rhoads, Director of Education for the Options Institute at the Chicago Board Options Exchange, home of the well-known VIX and CBOE Russell 2000® Volatility Indexsm (RVXsm), which measure implied future volatility expectations for US large- and small-cap stocks, respectively. Russell put matters into perspective, saying that the VIX has fallen to 13 recently, and to reach the long-term average for this measure of US large-cap equity market volatility we need to get closer to 20. Looking at US small-cap equity market volatility, he also pointed out that, the perceived risk level for US small-cap stocks relative to US large-cap stocks has increased, as evidenced by relative price levels for the CBOE Russell 2000® Volatility Indexsm (RVXsm) and the CBOE Volatility Index®(VIX®).
All panelists agreed that, regardless of where small caps go from a volatility and performance standpoint in the coming months, we are definitely heading into a period of further uncertainty in the markets, with a number of unknowns on the horizon, notably Fed policy and the elections. And as we all reinforced the notion that none of us have a crystal ball to help us see into what the future may hold for the markets and investors, I shared some recent studies from FTSE Russell on interest rates and elections and the responses of market indexes. Specifically, we found that, during extended periods of rising interest rates, the Russell 2000® Index (comprising US small-cap stocks) has fallen, but these impacts are shown to lessen over time. In addition, our research tells us that, during times of election uncertainty, short-term volatility has been experienced by US small-cap stock indexes, but there is no conclusive evidence showing a market preference for certain political parties.
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Views expressed by panellists are as of April 5th and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the London Stock Exchange Group.