Small Caps Surge as Hedging Costs Hit 16-Month Lows

Since the U.S. election, small cap stocks (blue line) have advanced more than twice as much as large cap names (red line) and have more recently been consolidating gains after a very strong one month surge.

image

Meanwhile, options to protect against a decline in the iShares Russell 2000 etf haven’t been this cheap since August 2015.

image

Over the last ten years, on average, the Russell 2000 has returned ~2% more than the Russell 1000 (dark blue line with 1st, 2nd, and 3rd standard deviations noted in dotted lines). This year, the price performance gap between small and large caps rose from a relative low (two standard deviations below average/ not seen since early 2008) to a multi-year extreme (two standard deviations above average) on December 8th. The last time small caps rose this much versus their large cap peers was in late 2013/2014. Back then, small caps went from a near three standard deviation extreme on the upside to a one standard deviation extreme relative underperformance, finally bottoming in October 2014.

image

Perhaps that cheap insurance would be useful in the short-term, until the relative performance of small caps falls back into less extreme historical norms?