A stock market recovery should be good for one investment in particular: small cap stocks.
The reasons are very simple:
1. Smaller companies tend to be more focused on services than goods, more domestic and less dependent on international markets. The service economy took a bigger hit than goods-producing firms during the pandemic, so there’s more room for growth there.
2. Companies with local and domestic supply chains will do better than those still dealing with international bottlenecks. And bringing production back home to avoid future disruption to supply chains will reward domestic producers.
3. Small caps are trading at a roughly 40% discount to large caps, according to Yardeni Research. The S&P 500 (large cap) price-to-earnings (P/E) ratio is currently above 17, while the S&P 600 (small cap) P/E ratio is about 12. Small caps may close that gap early in 2023 too, considering that small cap stocks tend to outperform large caps in January.
Sven Franssen