Many People to Refocus on Small-Cap Stocks

The Russell 2000 Index, which represents small-cap US stocks, once broke the 2,000-point mark. Since the end of September, it has risen by 32.7%, which is much higher than the 11.5% of the S&P 500 index. US small-cap stocks have gone from a sharp decline and lagging behind large-cap stocks to a reversal. The strong rise has caused many people to refocus on small-cap stocks with greater volatility. But can small-cap U.S. stocks continue to outperform large-caps next year? What is the potential increase in the future?

1. The rapid economic recovery is conducive to the recovery of small-cap stocks’ profits

Source: Bloomberg, compiled by “Juheng Buying Fund”, using Russell 2000 Index, date of data: 2020/12/28. This information is only a simulation back test of historical data, and is not a guarantee for future investment profits. Different data results may be obtained under different index trends, proportions and periods.
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Compared with large-scale stocks with global business scope, small-scale stocks in the United States are more closely related to the economy of the United States itself, and can better reflect the economic cycle of the United States itself. As can be seen from the above figure, the earnings per share of US small stocks is similar to the trend of the annual growth rate of the leading US indexes. When the annual growth rate of the leading US indexes bottoms out, the earnings per share of US small stocks will often follow the trend to improve. At present, the annual growth rate of the leading index of the US economy has risen from-13.2% in April to-2.2% in November. In addition, the average growth rate of major investment institutions for the next two years of the United States is 4.0%. Compared with 3.1%, the earnings per share of US small stocks has a high chance of continuing to improve in the next two years.

2. The economy has moved from recession to recovery, and the performance of small stocks has just begun
According to the definition of the National Institute of Economic Research, the United States is currently in a period of economic recession. However, if the Federal Reserve Bank of New York predicts when the recession will end, the probability of a recession in the next 12 months shows that the US economy is only one step away from the recession (for details, please refer to How to use the business cycle to expand earnings?). Judging from the five times the United States has stepped out of the economic recession record since 1979, one year after the economic recession officially ended, US small and large stocks rose an average of 9.1% and 3.3%, and three years after the end, an average of 47.9% and 30.0%. One year after the end of the recession, US small-cap stocks beat large-cap stocks every time. In the next two and three years, only small-cap stocks underperformed 4% in 1982. Small-cap stocks still won the other four times.

Source: Bloomberg, compiled by “Juheng Buying Fund”, using Russell 2000 and S&P 500 indexes, data period: 1979-2020. This information is only a simulation back test of historical data, and is not a guarantee for future investment profits. Different data results may be obtained under different index trends, proportions and periods.

3. Risk aversion is declining, and small stocks are more popular
Source: Bloomberg, compiled by “Juheng Buying Fund”, using S&P 500 and Russell 2000 indexes, date of data: 2020/12/28. This information is only a simulation back test of historical data, and is not a guarantee for future investment profits. Different data results may be obtained under different index trends, proportions and periods.