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Since 1978, Only 50% of Small-Cap Bears Preceded Large-Cap Bears

On January 13, 2016, the Russell 2000 (RUT) index of. U.S. small cap stocks fell into a bear market after topping out on 6/23/15 (the S&P SmallCap 600 has yet to slip into bear market mode and is off 18% since its 6/23/15 high). Many regard small caps as the canary in the coal mine, implying that the S&P 500 will likely soon fall into its own bear market. But does history support this notion? No. Since 1980, the S&P 500 followed RUT into bear territory only 50% of the time.

The Russell 2000 has endured 11 completed bear markets since the start of the series in 1979. During each of these bears, the S&P 500 was already in correction mode, having fallen more than 10%, but less than 20%. Yet in only 50% of the time did the S&P 500 follow RUT into its own bear market. Indeed, the S&P 500 bottomed in correction mode in 1980, ’84, ’98, 2010 and ’11. When the S&P 500 did fall into a bear market, it did so an average of 142 days later, or a bit less than five months after RUT succumbed.

Large Caps Stocks Follow Small Caps Into A Bear Market 50% of the Time Since 1980

In conclusion, history reminds us that even though large and small cap stocks are very highly correlated, just because small caps have now fallen into a bear market doesn’t mean that large caps will too.

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