According to The Wall Street Journal, small cap stocks are outperforming large caps by the widest margin in more than two decades. Over the past six months, small caps have outperformed the S&P 500 by nearly 30%.
You may have heard of the small cap effect. It is the observation that small cap stocks outperform large cap stocks over the long run. Though they do so at the cost of higher volatility. Between 1925 and the end of 2006, U.S. small caps rose 15,922-fold. That compares with a return of only 19 times principal for U.S. government bills over the same period.
It’s worth remembering that today’s leading large cap stocks were once small cap stocks. But small caps can underperform for decades, making them a difficult asset class to hold. Small caps tend to outperform during periods of strong economic growth and growth strategies tend to outperform value strategies during times like this as well. If you invest only in small cap stocks, you will outperform the S&P 500 over the long term. The downside of this small cap only strategy is that there are long periods when small caps underperform. But in bullish years, small cap stocks are the ones to own.
The combination of fiscal and monetary stimulus and a robust economic rebound makes 2021 a good time to bet on small cap growth stocks. All investment strategies have their seasons. Today’s investment season is small cap stocks.
Sven Franssen