{"id":9434,"date":"2021-03-22T05:14:22","date_gmt":"2021-03-22T05:14:22","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9434"},"modified":"2022-02-26T13:05:52","modified_gmt":"2022-02-26T13:05:52","slug":"why-are-small-caps-outperforming","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/why-are-small-caps-outperforming\/","title":{"rendered":"Why Are Small-Caps Outperforming?"},"content":{"rendered":"\n<p>Small-cap stocks are having a very strong 2021 so far.\nThrough the first two months of the new year, small-caps have been\noutperforming large-caps by the largest margin in over two decades. And when I\nsay large margin, I mean <em>really <\/em>large\nmargin \u2013 year-to-date through March 16, small-caps have outperformed large-caps by 15%.<sup>1<\/sup><\/p>\n\n\n\n<p>There is plenty of historical data suggesting that over long\nperiods, small-cap stocks tend to edge out large-caps on an annualized basis.\nIt\u2019s usually referred to as the \u201csize effect,\u201d and tends to be narrow but still\nmeaningful over time. So, while small-caps&#8217; recent outperformance over\nlarge-caps is nothing new, the sheer size of the outperformance gap is worth\nnoting and asking a few questions about. <\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_22&amp;content=stock_market_outlook_report\">How Long Will the Economic Expansion and Bull Market Last?<\/a><\/strong><\/p>\n\n\n\n<p>The stock market has been signaling a strong economic\nrecovery in the months ahead. Many investors may be wondering how much more\nupside is possible in 2021? But there is no way of knowing how long this surge\ncould last. Instead of focusing on the \u201cwhat if\u2019s\u201d, I recommend focusing on the\nhard data and economic indicators that could impact your investments in the\nlong-term. <\/p>\n\n\n\n<p>To help you do this, I am offering all readers our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>S&amp;P\n500 earnings growth<\/em><\/li><li><em>Outlook\nfor underlying U.S. economy?<\/em><\/li><li><em>U.S.\nreturns expectations for 2021<\/em><\/li><li><em>What\nproduces 2021 optimism?&nbsp; <\/em><\/li><li><em>Is\nit time to buy U.S. stocks?<\/em><\/li><li><em>Update\non U.S. fiscal stimulus<\/em><\/li><li><em>And\nmuch more\u2026<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0<br> <strong><br>IT\u2019S FREE.\u00a0<a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_22&amp;content=stock_market_outlook_report\">Download the Just-Released April 2021 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_22&amp;content=stock_market_outlook_report\">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>First, is there a reason for this outperformance? <\/p>\n\n\n\n<p>I think one reason for the outperformance is tied to the\n\u2018value-over-growth\u2019 theme I\u2019ve written about recently. Small-cap stocks are\ncurrently closer to the value end of the spectrum than large-cap stocks. If we\ndefine value stocks as having low price to per-share book value ratios relative\nto their growth counterparts, then small-caps are looking like the value in the\ncurrent environment while large- and mega-caps are looking like growth stocks.<\/p>\n\n\n\n<p>The price to per-share book value ratio of the Russell Top\n50 Mega-Cap Index is 5.7x (through the end of February), the Russell 1000 Index\n(largest 1,000 stocks) is 4.2x, and the Russell 2000 Index (small caps) is\n2.5x. Investors can find value in small-caps.<\/p>\n\n\n\n<p>One of the reasons for the rotation from growth to value is mean\nreversion. Since 2007, the outperformance of growth relative to value has\napproached levels not seen since the 1930s and the dot com bubble. In fact, the\nspread between the price-to-earnings (P\/E) ratio on growth and the P\/E ratio on\nvalue stocks is the highest it has been since 2000, when the bubble burst on\nmany growth names.<sup>3<\/sup> This makes value stocks look attractive relative\nto growth stocks, which again has been a tailwind for small-caps, in my view. <\/p>\n\n\n\n<p>Another value-oriented benefit for small caps: rising interest rates\nand the possibility of inflation. Expectations of higher inflation tend to push\nlong-term interest rates higher, which has been impacting areas of the market\nwith relatively high P\/E ratios (i.e., growth). This could mean a reality check\nfor many high-flying technology and other growth names, and could trigger an\ninvestor rotation into value, benefiting small-caps in the process. <\/p>\n\n\n\n<p>One final reason for small-caps doing well, in my view \u2013 we\u2019re in the early days of a new economic expansion and bull market. The stock market has been signaling a strong economic recovery in the months ahead, and small-cap stocks have historically done well early in a new cycle when liquidity is cheap and overall growth rates are faster. There is no way of knowing how long this initial surge could last, but I like small-cap exposure as part of a broadly diversified equity portfolio right now. <\/p>\n\n\n\n<p>At Zacks Investment Management, our Small-Cap Equity Strategy\nscreens all 2000 stocks in the Russell 2000 Small-Cap Index, and we access the\npower of our own industry-leading research firm to construct a portfolio of\nabout 100 stocks. Our research process and data-driven decision-making means\nthat if any one of the stocks exhibits declining fundamentals, we\u2019ll sell it. <\/p>\n\n\n\n<p><strong>Bottom Line for\nInvestors<\/strong><\/p>\n\n\n\n<p>Small-caps have had a strong run relative to large-cap\nstocks, particularly within the value vs. growth realm. While no one can know\nfor sure how long the outperformance might last, I think carefully selected\nsmall-cap stocks can be beneficial as part of a broadly diversified portfolio\nof equities (assuming your goals and risk tolerance allow for it). I also think\nthis economic expansion has plenty of room to run, and small-caps could benefit\nfrom rapid growth in the early phases. The Zacks Small-Cap Equity Strategy is\nan option to consider when positioning for this potential growth.<\/p>\n\n\n\n<p>In addition to maintaining a diversified portfolio, I recommend focusing on key data points and economic indicators that could positively impact your investments in the future. To guide you, I am offering all readers our\u00a0<strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_03_22&amp;content=stock_market_outlook_report\">Just-Released April 2021 Stock Market Outlook Report.\u00a0<\/a><\/strong><\/p>\n\n\n\n<p>This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>S&amp;P\n500 earnings growth<\/em><\/li><li><em>Outlook\nfor underlying U.S. economy?<\/em><\/li><li><em>U.S.\nreturns expectations for 2021<\/em><\/li><li><em>What\nproduces 2021 optimism?&nbsp; <\/em><\/li><li><em>Is\nit time to buy U.S. stocks?<\/em><\/li><li><em>Update\non U.S. fiscal stimulus<\/em><\/li><li><em>And\nmuch more\u2026<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Mitch takes a closer look at factors driving the strong outperformance of small-cap stocks <\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-9434","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9434","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9434"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9434\/revisions"}],"predecessor-version":[{"id":10428,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9434\/revisions\/10428"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9434"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9434"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9434"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}