Speed Away in Small-Caps: Leave Large-Caps in the Rearview Mirror!

Small-cap stocks have been on a streak recently, shooting up to record highs as they pull away from their large-cap counterparts. Large-cap stocks, on the other hand, have been struggling to keep pace. This trend could be a sign of an upcoming bull market or, it could just be a minor pullback from the extremes experienced during the pandemic-induced selloff in 2020. The rally in small-cap stocks is likely due to investors seeking out higher returns in the riskier asset class. The broader stock market, as represented by the S&P 500, has seen a tremendous run-up in prices due to robust economic growth and low interest rates. Small-cap stocks, however, are seen as riskier as they are less diversified and typically narrower in scope. That means they are more volatile, but also more likely to benefit from any gains in the overall economy. This outperformance of small-cap stocks is also being driven by a trend towards value stocks. Growth stocks, while still popular, have been taking a backseat while value stocks have been gaining ground as investors look for value in the markets. Many small-cap stocks have traditionally operated as value stocks and are therefore enjoying the surge in that sector as well. For investors, it is important to watch the small-cap market and be able to recognize the differences between small-cap and large-cap stocks. While small-caps may have higher short-term potential, they may also present higher levels of volatility. As always, investors should conduct their own due diligence and use a long-term approach to investing in order to be successful in the stock market. Overall, the outperformance of small-caps over large-caps is an encouraging sign that the markets remain resilient in the face of global macroeconomic and pandemic-related uncertainty. Small-cap stocks may be the ticket to higher returns in the coming months, so long as investors remain cognizant of the additional risk involved.