Small-Caps BIG Plunge in Risk-Off Leap!

As investors became more risk averse in the wake of coronavirus fears, the dangers of market volatility have become all too real. Small caps, which often lead the markets boom and bust cycle, felt the full force of repercussions after the global stock market plunge. Small cap stocks, those valued below $2 billion in market cap, fell 5.3% in the U.S, leading the broader market lower on the back of investor jitters. Small caps usually soar when investor appetite for risk increases as they have the potential for higher returns due to their low-market capitalization. However, they are classically the first casualties of a market meltdown, as traders prioritize safety over growth in times of uncertainty. The fall in small caps follows a similar pattern seen during the last major market meltdown in 2008. In 2008, the Russell 2000 dropped 51% peak to trough, much worse than the S&P 500 which dropped only 40% lowest point. Subsequently, small cap stocks actually outperformed larger companies in terms of returns during one of the most tumultuous financial eras ever witnessed. But, volatility is also characteristic of these types of stocks and is something that investors should factor into their risk and return calculations. Prior to the Covid-19 panic, small caps were postponed due to their raging bull run and appetite for risk, but this latest sell-off further highlights the need for a diversified portfolio when dealing with these stocks. In light of the recent market plunge, it is important that investors do their research when investing in small caps. While they can carry tremendous upside if traded correctly, investors must be mindful of the savage volatility that these stocks can subject investors to – a risk that frequently isn’t worth its reward.