The Resurgence Of Small Caps – 2021 Outlook

  • An economic rebound in 2021 should benefit small-cap companies.
  • Monetary and fiscal policy alignment to boost economic growth.
  • Small-cap stocks can be the high growth cyclicals and outperform after lagging in 2020.
  • A key risk exists if the rollout of vaccines is slow and pushes out a strong rebound; tax hike risk to be limited.
  • An overweight in small caps can be a prudent strategy, with the Russell 2000 index poised to perform strongly. ~ Bull Vs Bear

Market Pulse

The year 2020 was a starkly contrasting tapestry. As the economy was reeling from an unrelenting pandemic, the stock market overcame a severe drop to march higher during the second half. It's a year that will not be missed for the challenges it presented. But for many investors who were appropriately positioned, it did provide some fond memories.

Last year presented challenges that were unprecedented in modern history. So predicting the market was a game of luck! You could be right one month and be completely wrong the next.

It was a year that required both change and continuity to stay ahead in the market. A year in which it was hard to predict where things would go, but changing quickly to recognize and accepting a new overarching trend was an essential predictor of success. Continuity in the market was needed by staying invested in the second half. With the new bull market becoming super-expensive from Summer onwards as the economy withered, it required continuity of the investment approach and being overweight equities to capture attractive returns. Staying on the sidelines would have been a frustrating experience.

In determining total returns, equally important as security selection are the times when one is invested and the investing behavior based on the investment approach. The approach served us well as the Prudent Small Cap model portfolio outperformed the Russell 2000 index (IWM). ~ 2020 Small Performance

Small Caps To Be Stronger in 2021

The Russell 2000 small cap index has underperformed the larger caps materially over the last two years. It may come as a surprise, but small cap stocks made their all-time high in September 2018. For over two years, the small cap index just consolidated, while large cap stocks, represented by the S&P 500 (SPY) and the Nasdaq (QQQ), notched multiple new highs in 2019 and 2020. It was such rough going for small cap stocks that entering November last year, they still had negative returns for 2020. The powerful rally that emerged since then has allowed the small cap index to finally breakout to a new high. But it still has a lot of catching up to do.

1 2 3 4
View single page >> |

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.