article 01-20-2016

The Bear's Awake. Now what?

With the Russell 2000 Index down 20% from its 2015 high, we are officially in a bear market. We believe the small-cap market cycle will be a healthy one and that current valuations are creating opportunities to build strong absolute long-term performance.

The Russell 2000 Index officially entered a bear market in early 2016 and has continued to sell off with the rest of the market. The small-cap index made an inter-day low on January 13, down more than 21% from its previous high on June 23, 2015.

We continue to believe that the market’s behavior in the latter half of 2015 and the early part of 2016 reflects the deep uncertainty about a global economic environment where key commodities have collapsed, credit has tightened, and global currencies (ex the U.S. Dollar) have drifted lower.

To be sure, then, the market has in many ways already responded to the threat of a recession – and in our view has overestimated its probability.

In fact, our research indicates that in eight of the last nine previous declines of at least 20%, the Russell 2000 moved higher. The average recovery was 17.3%.

Is a 20% decline in the Russell a buy signal?

R2K-20percent-decline-recovery

It is always important to remember that stock market corrections come and go—they are as inevitable as they are unpleasant. It’s important to keep in mind that they have always been finite and we believe, in the case of this particular small-cap market cycle, ultimately healthy.

Investing during painful market declines can be one of the most effective ways to build strong absolute long-term performance. We believe that current conditions are creating such opportunities, with small-cap valuations that look alluringly attractive to us.

Stay tuned…

Important Disclosure Information

Francis Gannon is Co-Chief Investment Officer and Managing Director of Royce & Associates, LLC, investment adviser to The Royce Funds. Mr. Gannon's thoughts and opinions expressed in this piece are solely his own and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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