Long Term Perspective

The Russell 2000 rose 3.3 percent in 2005; it was healthy relative to other key market indexes, but weaker than last year's spurt - and a smaller rise than the S&P Small Cap index which also measures the small cap market. Most market analysts were surprised at the strength of the small cap sector this year, expecting that the large cap sector would perform better. But they were wrong. Its 10-year average return decreased to 9.1 percent in 2005. The Russell 2000 is a benchmark index for the small capitalization sector. It has a longer history than the S&P Small Cap Index and also has a wider base (2000 stocks vs. 600 for the S&P).

Short Term Perspective

Small cap stocks seem to get hit more dramatically than large cap stocks in times of uncertainty but they also tend to rebound more sharply in economic recovery. This index gets revised each year in July when stocks no longer fitting the "small-cap" criterion are removed from the index. Fast growing high tech companies fit this description in the late 1990s - although many former high flyers were removed from the index in 2001, 2002 and 2003. Growth in 2004 was exceptional relative to the large cap market.

This index showed solid gains on a year-over-year basis through the first half of 2005, but less so in the second half of the year. The Russell 2000 stood 16.8 percent higher than the year earlier period in November. At November's end, the Russell 2000 was 16.8 percent higher than at year-end 2005.

The Russell 2000 increased 2.5 percent in November after soaring 5.7 percent in the previous month. Inflation and future interest rate changes remain key concerns, although market players were relieved that the Fed has not increased interest rates of late. Economic growth has moderated, although inflation has not yet moderated sufficiently to fall in the Fed's comfort zone.