Smaller stocks began to rally at the end of 2020 after getting hit hard during the onset of the Covid-19 pandemic in the United States a year ago and they’ve continued to surge ever since.
“The Russell 2000 has had its best back-to-back quarterly gains in history,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, in a recent report.
“Even after a rotation towards value and small cap stocks in recent months, relative to history they still look cheap compared to large-cap growth stocks and should benefit from a very strong economic surge,” said David Kelly, chief global strategist with JPMorgan Funds, in a report.
If the dollar continues to gain momentum, that should be great news for domestic consumer companies — and not so great for top multinationals — because a stronger dollar hurts the value of sales and profits generated overseas.
Investors in smaller companies are also flocking more to value-oriented sectors such as banks, energy and consumer firms, as opposed to growth sectors like tech and biotech — a trend that’s taking place with larger stocks as well.
Investor risk appetite is growing
The rally in small caps comes as many individual investors are gravitating toward riskier (and in some cases, unprofitable) smaller companies.
So investors should be prepared for more swings in the Russell 2000.
“Even before the ‘Reddit revolution’ emerged, active investors have long been drawn toward the realm of small-cap stocks,” said Lule Demmissie, president of Ally Invest, in a recent report.
Smaller companies usually beget increased volatility. “These stocks are prone to go up more in good times, but that can be a double-edged sword in bad times,” Demmissie added.