We all know the markets are at all-time highs with major benchmarks, such as the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite, testing new records. The impressive stock market performance has been driven by a variety of factors, including regulatory clarity, surging economic growth, accommodative monetary policy, and renewed optimism regarding a U.S.-China trade deal.
Despite all the optimism, many investors have become cautious as major indexes move closer to entering overbought conditions. But while many are growing bearish, some investors are turning to small caps, which have been one of the top performing stock sectors this year, as a potential safe haven.
The small cap stock sector has historically provided more consistent growth than larger, blue-chip index stocks. Small caps tend to have a much smaller market capitalization than larger companies, which makes them more volatile. But these types of stocks also have the potential for bigger rewards, as investors can benefit from undervalued opportunities not always accessible to the market.
Moreover, the small cap sector has consistently outperformed the market over the long term. According to data from a Rutgers University study from 2017, small caps have outperformed large caps by roughly 10 percent per year since 1982. This has been confirmed by the performance of the Russell 2000 index, which tracks 2000 of the smallest U.S. public companies, and is up 16 percent year-to-date.
As major indexes approach overbought conditions, investors may want to consider taking at least some of their money off the table and adding exposure to small cap stocks. Although these stocks can be more volatile, the potential rewards can be well worth the risk. For those investors who are willing to stomach the volatility, small cap stocks can be a great way to diversify a portfolio and capitalize on market corrections.