Why Small-Caps and Cyclical Stocks Celebrate the First Day of the Month

(Bloomberg) -- For all the market chaos of 2021, it’s also been a year of weird predictability. For a while, you could set your watch by mid-month options-related volatility. Another notable pattern has been the success of reopening trades when the calendar changes.

Small-cap stocks have been beneficiaries. Since January, the Russell 2000 has climbed an average of 1.2% on the first of the month, rising nine out of 11 times, compared with an average gain of 0.1% on any other randomly chosen day. The tendency was noted in a tweet by veteran market watcher Helene Meisler.

Nailing down the exact reason is probably impossible. The propensity, roughly mirrored in banks and other reopening plays, could be the result of institutional funds allocating money into strong-conviction bets, conceivably in anticipation of strong economic news, according to Mike Bailey, director of research at FBB Capital Partners. Loosely, the gains come right around the time the Institute for Supply Management’s gauge of factory activity comes out. 

“It’s hard to know what investors are thinking, but when you see manufacturing heating up on the same day as cyclicals and small caps are up, it suggests a strong connection,” Bailey said. “We could be looking at some program or quant trading that might be making multi-asset class bets across inflation, interest rates and cyclical industries.” 

Lu Yu, a portfolio manager at Allianz Global Investors US LLC, sees another possibility: Retail investors who have held a favorable view of the U.S. economy since the beginning of the year could be allocating their 401k/retirement funds to small-caps on a monthly basis.

“This is likely -- they sent instructions to allocate future flows to U.S. small caps,” she said.

The pattern was on display Monday, when the Russell 2000 rallied more than 2% to start November. Similarly, banks and raw-materials producers, stocks seen most sensitive to economic swings, also climbed.  

While it could be a coincidence, the pattern has been pretty durable. Monday marked the ninth time this year where the Russell 2000 rose on the first of a month. The 82% hit rate is higher than the 56% seen in the previous four decades, data compiled by Bloomberg show. 

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