Small-Caps Outperform Their Bigger Peers: Can They Hold The Fort?

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 Small-Caps Outperform Their Bigger Peers: Can They Hold The Fort?

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Summary

  • Smaller companies have outpaced their bigger counterparts as COVID cloud clears.
  • Russell 2000 gained more than 47 percent since November 2020.
  • Investors are turning their attention to cyclicals instead of the costly blue-chip stocks.

Companies with smaller market capitalization are the most to gain from an economic resurgence. If the rising value of the US treasury bonds are any indication, investors are already looking at other options instead of the expensive blue-chip stocks that seemed to have plateaued their growth curve.

This has been underscored by the unprecedented value addition of the small-cap Russell 2000 Index. Its data show that the small companies have grown faster than their bigger counterparts, gaining by more than 47 percent since November when the rollout of the first COVID vaccines were announced. 

Big tech companies benefited from the shift to e-commerce during the pandemic while the smaller companies with similar ventures suffered due to their inability to make such a transition.

Analysts estimate that more and more investors have turned their attention on cyclical stocks as the roadmap for vaccination production and rollout began to gain steam in the subsequent period.

Now with the easing of restrictions, they are most likely to improve their report card. And going forward, that momentum would be more visible for the smaller companies on the indexes.

Moreover, the bigger companies, though flush with capital, may still like to wait before committing to any major spending, smaller firms are less likely to hold back, given the attractive borrowing rates and huge government debt-spending and restructuring of loans for small and medium industries.

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US small caps to gain more from a rebound

Analysts believe that hopes of a faster recovery have given a new lease of life for the small-cap companies. One of the reasons for the consideration is the gap between S&P 500 and Russell 2000 in terms of year-to-date growth. While the S&P grew by 4 percent, Russell gained about 19 percent.

Also, the hike in long-term bank interest rates would help the Russell Index to climb up since it would increase the gap between the lender and borrower rates, analysts say. This would especially favor the financial stocks which constitute a major segment on the Russell index than the S&P 500.

Besides, the Russel index comprises of mostly small and regional banks while the blue-chip indexes are dominated by the larger financial institutions that are less likely to benefit from rate change.

Also, investors would weigh-in the price factor of the blue-chip stocks and the chances of return vis-a-vis the smaller companies that have potential to add bigger value. However, the small-cap companies still lag their bigger peers, though may have become moderately expensive today. But investors can take advantage of trusts like the JPMorgan US Smaller Companies Trust to reap the most from the current upswing in the small-cap stocks.

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