Daily Spotlight: Small Caps Picking up the Pace

Summary

Small- and mid-cap stocks (SMID) have outperformed large-caps over the past month. With the Russell 2000 advancing 10% while the S&P 500 has been stuck in neutral, SMID stocks may be in a better position to generate market-beating returns going forward. For one thing, these companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from unrest in the Middle East, the Russian invasion of Ukraine, China issues, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 Small-Cap Index at 13 compared to a trailing P/E of 25 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. From 2003-2021, the Russell 2000 climbed 450%, compared to an advance of 330% for the S&P 500. But SMID stocks can be risky. The standard deviation for monthly returns was 5.7% for SMID stocks over our 2003-2021 test period, versus 4.3% for large-caps. SMID stocks fell further in negative years during our test period, with an average 15% drop versus a 12% pullback for large-caps. Conversely, when SMID stocks rise, they tend to rise sharply. The ave