Don’t Sleep on the Small Caps

The return of high-flying growth stocks has stolen the show this year.

The NASDAQ Composite, which lagged throughout all of 2022 and ended the year 35% from its all-time highs, has risen more than 11% in 2023. That far outpaces gains in the value-oriented Dow Jones Industrial Average (+0.7%) and the benchmark S&P 500 Index (+5.4).

Slipping under the radar, though, have been small cap stocks. They’ve quietly gained 9.8% to start the year, and that run of outperformance could continue. Compared to the S&P 500, the Russell 2000 bottomed last May.

It’s been all higher highs and higher lows since then.

Last year’s back half outperformance was largely attributable to differences in sector weights. The Russell 2000 has more exposure to Financials, Health Care, Industrials, and Energy, (all areas that outperformed) and is underweight Communication Services and Tech (sectors that lagged).

But that isn’t the story this year. On a like-for-like basis, small caps have simply been better.

Within the Industrial sector, small caps are near 52-week highs when compared to their large cap counterparts.

It’s the same thing in consumer oriented sectors. For both Consumer Discretionary and Consumer Staples, small caps are approaching the relative highs set back in early 2021. Those are pretty textbook rounded bottoms.

And in the Energy sector, small caps are making progress on a downtrend reversal. In the first week of January, the smalls were setting new multi-year relative lows. But bears couldn’t keep them down.

From failed moves come fast moves in the opposite direction, and small cap Energy was no exception. Now the group has broken an 18-month downtrend and is further above its 200-day moving average than at any point since November 2021.

Don’t sleep on the small caps.

Comments are closed.

Up ↑