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.
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.