US small-cap rally sends valuations soaring

[NEW YORK] IN ONE corner of the US equity market, investor enthusiasm is exceeding the frenzy of the Internet bubble. Small-cap shares tracked by the Russell 2000 Index have rallied for seven straight quarters, the longest stretch ever, sending valuations 26 per cent above levels at the height of the 1990s rally. Gains in stocks from LogMeIn Inc to Athenahealth Inc have pushed the gauge up 248 per cent since the bull market began five years ago, leaving price-earnings ratios about three times as high as for shares in the Standard & Poor's 500 Index.

Surging small-caps were cited by Federal Reserve governor Daniel Tarullo last month as one reason policy makers should ensure they're not creating systemic risk in financial markets. While the increase in the Russell 2000 reflects speculation America's economy will expand faster than the rest of the world, investors may be getting ahead of themselves, according to Matthew Peron of Northern Trust Corp in Chicago. "Small-caps are all getting painted with the brush of success," Mr Peron said on March 19. "The story is more nuanced than that."

US stocks rose last week, with the S&P 500 climbing 1.4 per cent and the Russell 2000 adding one per cent, as better-than-forecast data on jobless claims and manufacturing offset comments by Federal Reserve chair Janet Yellen that interest rates could rise in the middle of next year. The benchmark gauge for smaller shares has risen 1.3 per cent this quarter, compared with a 0.5 per cent gain in the S&P 500.