Over the last three months, an index that tracks 2,000 of the smallest stocks in the U.S. market has more than tripled the gains of the big-cap S&P 500. The rally for the Russell 2000 got going
It marks at least a temporary return to form for smaller stocks, which have historically provided bigger returns than large-cap stocks over the long term.
The Russell 2000 currently includes stocks like
In recent years, smaller stocks had been mostly lagging further and further behind Apple and other Big Tech businesses. Those behemoths were among the few to deliver reliably big profit growth despite rolling economic crises around the world.
Last year, that gulf widened further when the pandemic tilted conditions even more in Big Tech's favour. The new stay-at-home economy meant consumers and businesses spent more time and money online, and investors flocked to a narrow group of behemoths positioned to take advantage of that.
By the end of last year, just five companies — Apple, Microsoft, Amazon,
With the global economy likely to rebound this year from 2020's slump, some of the best small-cap performers in recent months are companies that would benefit greatly if customers start heading outside again. Casino operator Bally’s, restaurant and video-game arcade chain Dave & Buster’s and Revlon have all more than doubled since
Smaller stocks are generally more reactive than big stocks to economic expectations, partly because they tend to have smaller financial cushions. That means they’re more at risk of collapsing under a weak economy, but their growth can also surge higher in a healthy one.
Other small caps, like
Small-cap stocks have historically provided bigger returns than large-cap stocks over the long term, as have so-called “value stocks.”
“The small-cap premium, that was gospel for us back then," he said. “They found that effect and justified it empirically and came up with theories, and then for the last 10 years, value has not had a premium and neither have small stocks. There’s a lot of room to catch up here.”