Small caps have been a pleasant surprise this year for investors. Last week, we saw Small Caps rocket to the upside while their larger counterparts lagged behind. With a 10% surge in the Russell 2000, and smaller caps surging to their third consecutive week of gains, investors are optimistic about continued growth in this area of the market.
Small caps, which represent smaller capitalized companies, often outperform their larger, more established competitors when the overall market is doing well. This is primarily due to the fact that small caps are seen as riskier investments than larger companies, which have a larger established market presence. As a result, when markets are bullish, investors tend to flock to small caps in order to take advantage of potentially greater returns. This has been true in this current market cycle, with the Russell 2000 index up over 140% since the pandemic lows last March.
Small caps have been propped up by a combination of factors this quarter, including improving economic data, increased liquidity from central banks, and higher stimulus checks. Investors have thus been keen to take advantage of companies that have the potential to benefit the most from these factors.
Notable stocks to have benefited from the Small Cap rally include Zoom Video Communications and Peloton Interactive. Zoom has seen a 300% run-up since March, propelled by a surge in demand for video conferencing as people began working from home. Peloton, meanwhile, has seen a 250% rise in stock price over the same period as people turned to their to stay active during the pandemic.
The Small Cap rally has come in stark contrast to the performance of large cap stocks, which have been weighed down by the tech sector. Large tech companies such as Microsoft, Apple, and Amazon have hit records highs, yet these gains have been offset by losses in other parts of the market. This has left large caps with a more muted performance, unable to keep up with the strength of the small caps.
Overall, the Small Cap rally has been a boon for investors. With central banks continuing their accommodative stance and economic data improving, small caps look set to continue their uptrend and outperform their larger counterparts. With this in mind, investors should be paying attention to the Small Cap sector for potential gains.