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Small Caps Have Rallied Back—Why We Think There’s More to Come

The Russell 2000 closed November with its best month since the index’s inception in 1979, completing small caps’ three-month run of outperforming the S&P 500 and making up significant ground. It was just September 30 when the Russell 2000 was down almost 9% versus the S&P’s 5.57% return. As of November 30, the S&P has returned 14.02% for the year versus the Russell 2000’s 10.41% return. 

As impressive as the small cap index’s performance has been recently, though, consider that Calamos Timpani Small Cap Growth Fund (CTSIX) turned positive in May (see this post about its 14.92% return that month). The fund went on to book positive returns in five of the six subsequent months, including another double-digit November.

Can small cap stocks keep it up?

Historically, small cap stocks have done well following large monthly gains, according to data recently compiled by A Wealth of Common Sense blog.

small cap performance after every double digit return month

More to the point, “there is real substance behind small caps’ strong performance lately, and that’s what makes me think it’s sustainable,” says Brandon M. Nelson, CTSIX Senior Portfolio Manager.  

Small cap earnings revisions are at a new high, and sales revision ratios are close to a new high, according to a recent report from Jefferies.

small cap momentum a new high for earnings revisions

small cap momentum steepest sales revision in more than a decade

But even while fundamentals are improving, small cap valuations versus large caps' continue to be extremely inexpensive, Nelson says.

Small caps have outperformed recently—consistent with the new bull market Nelson called in April—but they still trail large caps over longer periods. After four years of lagging large caps, Nelson believes that small caps are likely to be staging a longer than three-month rally.

small cap stocks have outperformed large recently

but still have some catching up to do

Investment professionals, to track small cap performance and our perspectives on the asset class, subscribe to our monthly Small Cap Market Snapshot. For more information about CTSIX, contact your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.

Click here to view CTSIX's standardized performance.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-800-582-6959. Read it carefully before investing.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Important Risk Information. An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund's prospectus.

The principal risks of investing in the Calamos Timpani Small Cap Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, and portfolio selection risk. The Fund invests in small capitalization companies, which are often more volatile and less liquid than investments in larger companies. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

The S&P 500 Index is generally considered representative of the U.S. stock market.

The Russell 2000 Growth Index is a composite of small cap companies located in the U.S. that also exhibit a growth probability.

Morningstar Small Growth Category includes small-growth portfolios that focus on faster-growing companies whose shares are at the lower end of the market-capitalization range.

The Russell 1000 Index measures the performance of the large cap segment of the U.S. equity universe and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

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