As 2020 closes in, small caps have been setting the pace in terms of market performance, while large caps have mostly been left in the dust. According to recent analysis, the Russell 2000, which tracks small-cap stocks, is up by 4.9%, handily beating the S&P 500’s increase of 2.4%, the Dow Jones’ 0.9%, and the Nasdaq Composite’s 0.8%.
This strong showing by the Russell 2000 has been fueled by a multitude of factors, the most impactful of which is the reawakening of the market’s bearish sentiment. Investors are now favoring hard-hit sectors, such as oil and gas, financials, and semiconductors, among others. Small caps have generally been more volatile and resilient and thus have been more likely to benefit from increased risk appetite.
Moreover, the federal funds rate of 0.25% is also helping small caps. This rate has kept bond yields down, suppressing interest expenses for companies and allowing access to capital at historically low rates.
Investors have also been buoyed by news of potential vaccine breakthroughs, which have increased investor confidence and triggered a strong rally in all sectors, but especially small-cap stocks. This is because small-cap stocks tend to be higher-risk investments, making them more sensitive to news of potential businesses and economic recovery.
Finally, and perhaps most significantly, small caps have profited from a waning of attention focused on large caps. With the technology industry underperforming and no dominant stories driving market action, investors have been increasingly turning to different areas of the market to try to score a gain, and small caps are providing much of the fuel.
Overall, it is clear that small caps are taking the lead in 2020, outperforming large caps and leaving the latter in the dust. With an abundance of potential catalysts driving the small-cap outperformance, investors should keep a close eye on the sector. Those who get in early could be handsomely rewarded.
