By Philip Lawlor, managing director, Global Markets Research
Global equities posted the strongest monthly gains in years (if not decades) in April, recouping much of their pandemic-driven losses since late February. Markets rode hopes that sustained central-bank liquidity support and moves to end lockdowns in many countries could soon help kick-start economic activity – even as incoming data grew increasingly grimmer.
US stocks led the April relief rally: the Russell 1000 rose 13.2% for the month, and the US small cap Russell 2000 did even better, rising 13.7%. Both were well ahead of developed-market peers and the FTSE All-World ex US, which gained 7.7% for the month. The year-to-date COVID-19 toll has been far less severe for US stocks than for equity markets elsewhere.
Global equity total returns – April and YTD 2020 (local currency, %)
Source: FTSE Russell. Data as of April 30, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
Healthcare overweight gives Russell 2000 an edge
April also marked a major reversal in fortunes for the Russell 2000, which had lagged its large-cap counterpart in both the March meltdown and early in the rebound as investors gravitated to companies with bigger, more stable businesses and solid balance sheets. The April rebound pared the Russell 2000’s YTD loss to 21.1%, roughly halving the large performance gap with the Russell 1000 that had opened up this year.
The relative performance between US large and small cap stocks has followed big risk-on/risk-off swings in the US dollar. At this height of year’s pandemic panic, both large caps and the dollar gained from the massive investor flight to safety. But as these risk-off extremes have subsided, the stocks of smaller, more domestically oriented stocks that are in a better position to benefit from fiscal stimulus efforts and the Fed bond-buying (particularly of high-yield debt) gained favor.
Russell 1000 relative to Russell 2000 (TR, rebased) vs. USD real effective exchange rate
Source: FTSE Russell. April 30, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The strong US performance played on the strengths of each Russell index’s sector strengths. The Russell 1000 has a far bigger exposure than its small-cap counterpart to the technology heavyweights (i.e., the FAANGs) that have disproportionately powered the April rally. In turn, the Russell 2000’s edge came from its overweights in outperforming healthcare and consumer discretionary stocks.
The small-cap index’s exposures also tilt more toward cyclically sensitive industries such as financial services, materials and heavy-equipment producers that tend to perform better in periods of rising risk appetite.
Sector weights (%)
Source: FTSE Russell. April 30, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The chart below dissects the two performances even further: on an industry-weighted basis, the information technology sub-group was the Russell 1000’s top performer, contributing a quarter of the index’s total April returns, while the pharmaceutical and biotech sub-group was the Russell 2000’s top performer, accounting for 20% of its gains for the month (medical equipment added another 7%).
Top 10 industry-weighted contributions to total April 2020 returns (%)
Source: FTSE Russell. April 30, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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