S&P’s Small-Cap Stocks Post Largest Edge Over Megacaps in 11 Years

(Bloomberg) -- Months of megacap dominance frayed a bit in the U.S. stock market Monday with smaller companies in the S&P 500 posting their best day of outperformance in 11 years.

Buoyed by big bounces in fallen-angel retailers like Kohls Corp., Nordstrom Inc. and Gap Inc., a version of the S&P 500 that strips out market-value biases surged almost 3%, beating its capitalization-weighted counterpart by the biggest margin since 2009. The Russell 2000 Index of small caps gained 4.3% to bring its four-day gain to 8.5%.

While it sounds wonky, divergences between between the two measures -- and among large and small stocks in general -- have been a big story of the coronavirus rout, with rallies in megacap firms masking a much worse performance in the market at large. Even with today’s jump, the equal-weighted S&P 500 remains down 18% this year, almost twice as much as the regular version and 16 percentage points more than the Nasdaq Composite.

“Everyone’s heartened by the fact that there are some signs that the economy is opening up,” said Paul Nolte, a portfolio manager at Kingsview Investment Management in Chicago.

Struggles among smaller firms have kept a technical measure followed by chart analysts -- breadth -- worrisomely low after the market bottomed on March 23. “Narrow breadth can last for extended periods, but past episodes have signaled below-average market returns and eventual momentum reversals,” Goldman Sachs strategists including David Kostin wrote in a note Friday.

The S&P 500’s equal-weighted index gained 2.8% -- its fourth advance of this magnitude in April -- as investors flocked to some of the most beaten down names on optimism the U.S. economy could soon start to reopen. The regular S&P 500 added 1.5%. Many of the sectors hit hardest by the virus and lockdown have been smaller firms that don’t have an ample cash hoard, balance sheet strength and diversification that some of their biggest peers have.

At least for a day, those companies shone. Retailers Kohls, Gap and Nordstrom, three of the bottom 10 weightings in the S&P, jumped at least 12% . Cruise liners and casinos, which have lost more than 60% of their value during the the market rout, also soared. At the same time, several giant tech companies declined. Amazon.com lost 1.4%.

Financials were another bright spot. After plunging as much as 43% between mid-February and late March, the group climbed 3.6% on Monday. Zions Bancorp, one of the 50-smallest stocks in the S&P, rose 4.5%, while Inveso Ltd, one the 15-smallest constituents of the gauge, increased 1.9%.

It’s a departure from last month, when the S&P 500 equal-weighted index -- which makes no distinction between Amazon.com Inc. and Alaska Air Group Inc. -- trailed its cap-weighed brethren by 5.7 percentage points, the most since data going back to 1990.

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