Small Caps Record A New High, Finally, With More To Come

Nov. 23, 2020 8:00 AM ETIWM, TNA, TZA, RWM, SRTY, TWM, VTWO, URTY, UWM, SPSM, OMFS, RYRSX, IJR, CELH, UPWK, APPS, SPWR, PACB, KURA, CLDX, EAT, EXPI, JMIA, REPL, TRIL, TGTX, KOD, PRTS, HPQ, NVTA, NTRA5 Comments

Summary

  • Small caps finally record a new high after two years and turn positive for the year.
  • Vaccine progress is raising expectations of a more robust and durable economic recovery in 2021, driving a rotation into lagging segments and economically sensitive sectors.
  • Small caps can witness an earnings surge next year.
  • Expanding risk appetite, earnings momentum in 2021, and a multi-year breakout create a strong case for small-cap exposure, even though a broader overbought market risk exists.
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PrudentBiotech.com ~ Stock Market, Shutterfly

Source: Shutterfly; edits by PrudentBiotech.com

Market Pulse

The small-cap stocks have finally stirred.

The Russell 2000 Index (IWM), a key benchmark for small-cap stocks, has been the rare major index that has not recorded a recent new high. The last one was recorded back in July 2018. After over 2 years, the index finally achieved that elusive milestone, as it rallied to an all-time high this month. The sharp rally this month has also boosted the index finally into positive territory for the year.

GraycellAdvisors.com ~ Russell 2000 Performance, Nov 2020, Yahoo

(Source: Yahoo Finance; Edits by GraycellAdvisors.com)

Economically Sensitive Stocks To Lead The Market

The renewed vigor in small caps is the result of an expectation of more consistent economic growth next year. The potential availability of vaccines and treatments early next year, and a new administration with a greater emphasis on a national pandemic strategy, improve the odds of overcoming the disease rapidly and delivering a more sustained and sharper economic recovery next year. What is good for the US economy is good for small caps - a market segment that is quite sensitive to the economy.

As the economy improves, the small caps have significant potential for earnings growth, just like the larger-caps have begun to experience, particularly in the technology sector. During the third quarter, the earnings picture brightened sharply for larger caps in the S&P 500 (SPY), with earnings beats more widespread amongst industries and not just limited to the technology mega-caps, like Microsoft (MSFT), Google Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), and Facebook (FB). Analysts are already raising the S&P 500 estimates for the fourth quarter, as per FactSet.

Risk-Appetite Will Only Grow, Making It Harder To Ignore Small Caps

Small-cap stocks have surged this month, after lagging significantly for the entire year.

This broadening participation behooves well for the stock market. The

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This article was written by

Tarun Chandra, CFA profile picture
4.68K Followers
A healthcare growth portfolio with a record of consistently strong returns

I have worked as an Analyst on both the Buy (Asset Management) and Sell (Investment Brokerage) sides, as well as in Strategy and Finance roles for technology services companies. For many years, I have been publishing risk-adjusted, return-driven quantitative model portfolios.


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