As markets have swung wildly since the onset of the coronavirus pandemic, small-cap stocks have been often overlooked or ignored entirely. But in the face of an uncertain economic future, small-caps and retail investors are keeping the faith despite turbulent times.
Small-cap stocks, shares of publicly-traded companies with a market capitalization of less than $2 billion, are often seen as riskier investments due to their smaller size and limited trading volume. But in the wake of Covid-19 and its unprecedented economic fallout, these stocks have held their own.
To be sure, small-caps have not been immune to the market turmoil, as they rose and fell in lockstep with the broader market in the early weeks of the pandemic. But in recent months, the Russell 2000 SmallCap index has outperformed the S&P 500 by a significant margin, suggesting that investors are taking a longer view on small-cap stocks.
The resilience of small-caps and retail investors also comes down to a shared philosophy: value and quality. A recent Bank of America survey found that investors looking to improve long-term returns were most focused on “buying good quality companies at good values.”
In particular, small-cap investors are searching for quality companies that are priced low today, but will be more valuable in the future. They are confident that this longer-term approach will pay off, providing the market with resilience in turbulent times.
And while institutional investors remain the dominant players on Wall Street, retail investors are playing an increasingly important role. Online trading platforms have made investing in stocks much more accessible to everyday investors, and so more of these investors are putting their money to work.
Moreover, retail investors are increasingly savvier in their stock trading. Many investors are taking advantage of free online classes and programs, such as those hosted by brokerages like TD Ameritrade, to become better informed.
Retail investors are also inspired by success stories, such as the rags-to-riches story of Motley Fool. Founded by two brothers, the stock market newsletter was able to pick out winning stocks before Wall Street was even aware of them.
In times of crisis, retail investors have held the line in the sand. By exercising carefulness, taking the long-view approach and taking advantage of the available resources, smaller investors are holding up their end of the bargain in the stock market. And while they have been often overlooked, small-caps and retail investors are proving their staying power in tumultuous times.