Russell 2000 bounces back from a spring nosedive to log a 15% gain so far this year, surpassing the S&P 500

Shares of small U.S. companies have surged past their larger peers for 2020 after last months furious rally carried into December.Fueled by improving expectations for the economy, thanks to promising Covid-19 vaccine trials, the Russell 2000 small-cap index notched its best-ever month in November. Then it kept rising. So far in December it has advanced 5%, well ahead of the 1.2% rise in the S&P 500 large-cap benchmark. Many investors expect small-cap stocks to continue leading the way.Among the stocks lifting the small-cap index:
Macys Inc.,
up 8.5% in December;
Spirit Airlines Inc.,
up 16%;
Dennys Corp.
, up 20%; and, U.S. Steel Corp., up 29%.
The Russell 2000s gain for the year surpassed that of the S&P 500 on Tuesday for the first time in 2020, according to Dow Jones Market Data. The small-cap gauge is now up 15% this year, compared with a 13% gain for the large-cap index. If the Russell 2000 maintains its edge, it would outperform the S&P 500 for the first time since 2016, according to Dow Jones Market Data. Both indexes still trail the technology-focused Nasdaq Composite, which is up 38%.
The Russell 2000s comeback is a dramatic turnaround from earlier in the year. The index plummeted 42% from its January high to its March lowa deeper plunge than that of the S&P 500as the coronavirus hampered activity and reshaped economic expectations. Small-caps spent the following months recovering much of that loss, but only in recent weeks made their dramatic run.
November was frankly unbelievable, said Lamar Villere, portfolio manager at investment firm Villere & Co., which manages $2 billion. Wed been shouting til we were blue in the face that small-caps were getting left behind in the recovery, and as soon as the vaccines came out, the small-caps had just a stunning run.
Investors this week will parse weekly jobless claims data for insights into the labor-market recovery and scrutinize earnings reports from companies including
Darden Restaurants Inc.
and
Nike Inc.
for signs of consumer behavior.
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Small-caps typically do well during economic recoveries, and the encouraging reports about vaccine candidates have contributed to an expectation that hard-hit industries will bounce back next year. Economists project the rollout of vaccines to boost growth in next years second quarter, and data Friday showed U.S. consumers grew more confident about the economy in late November and early December.
Expectations for an improving economy are also evident in investors recent preferences among large-cap stocks. The energy sector is leading the S&P 500 in December with a 12% advance, and the financials group is also outperforming. Those sectors are still by far the biggest losers in the index this year, off 33% and 7.8%, respectively.
The long-dominant information technology sector, by contrast, is lagging behind this month, while highflying megacap stocks
Amazon.com Inc.,Microsoft Corp.
and
Facebook Inc.
have suffered losses. The tech sector continues to lead the way in 2020 with a 35% gain.
Small-cap companies often have a less diversified range of business and more volatile earnings than larger corporations, making them more likely to falter during an economic downturn. The average market capitalization of stocks in the Russell 2000 is just under $3 billion, compared with $62.5 billion for constituents of the S&P 500, according to data from the index providers at the end of November.
Many small stocks are closely tied to the health of the domestic economy. Another small-cap gauge, the S&P Small Cap 600, derives 79% of its revenue from the U.S., versus 60% for the S&P 500, according to FactSet estimates. This exposure can make smaller firms quick to benefit as the economy accelerates.
Small-cap stocks have history on their side at this point. Generally coming out of recessions they tend to outperform large cap, said Duke Laflamme, chief investment officer at Eaton Vance WaterOak Advisors. I dont think its any different this time around.
Adding to the appeal, small-cap stocks are looking inexpensiveat least compared with their counterparts. A BofA Global Research analysis comparing valuations of the Russell 2000 with those of the large-cap Russell 1000 index found the relative discount for small-caps in recent months was the largest since 2001.
Thats even though stocks overall have grown pricier relative to their earnings. The Russell 2000 traded at the end of November at 18.1 times its projected earnings over the next 12 months, above an average since 1985 of 15.3, according to BofA.
Some money managers say they believe the relative discount will help focus attention on smaller companies, particularly as an accelerating economy primes a wider range of businesses for growth.
Nancy Prial, co-CEO and senior portfolio manager at Essex Investment Management, said her firm has bought shares of industrial and financial companies in the micro-, small- and midcap categories in recent months, while trimming positions in work-from-home stocks.
We think that we are at the beginning of a small-cap cycle, she said. Theyre underowned, we believe theyre underloved and as that valuation discount narrows, that will be an opportunity for these sectors to really show some strong outperformance.
Write to Karen Langley at karen.langley@wsj.com
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