the Russell 2000 (RUT), an index that is home to many small-cap US stocks, is up about 13% so far in 2021. That’s better than the gains of the Dow, S&P 500 and the Mega Tech-dominated Nasdaq, which are up between 6% and 9% this year.
Smaller stocks started to rally at the end of 2020 after being hit hard during the outbreak of the Covid-19 pandemic in the United States a year ago and they have continued to rise. since.
“The Russell 2000 posted its best consecutive quarterly gains in history,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, in a recent report.
There are a lot of good reasons behind the boom in small businesses. Stimulus controls increase consumer spending and the national economy – and many Russell 2000 companies have a larger share of their sales coming from the United States than from international markets.
“Even after a rotation to value and small cap stocks in recent months, relative to history, they still look cheap compared to large cap growth stocks and should benefit from a very strong economic boost.” said David Kelly, chief strategist of JPMorgan Funds. , in a report.
Small businesses are also benefiting from a currency surge. The U.S. dollar index, which measures the greenback against a basket of other global currencies, is up about 3% in 2021 and is approaching its highs of 2021 (however, the index is still significantly lower than its all-time high of 1985).
If the dollar continues to gain momentum, this should be great news for domestic consumer companies – and less so for large multinationals – as a stronger dollar hurts the value of sales and profits generated abroad. .
Investors in small businesses are also flocking more to value-driven sectors such as banking, energy and consumer businesses, as opposed to growth sectors like tech and biotech – a trend that is also evident with more important actions.
the IShares Russell 2000 value (IWN) and Vanguard Russell 2000 Index Value Fund (VTWV) ETFs are each up nearly 23% this year as their growth counterparts (IWO) are up by less than 7%. (It is still a respectable gain for the smaller growth stocks (VTWG) However.)
Investors’ appetite for risk increases
The small cap rally comes as many individual investors turn to riskier (and in some cases, unprofitable) smaller companies.
The Reddit-Robinhood crowd has fallen head over heels for “memes stocks” as GameStop (GME). And, surprisingly, the video game retailer is still in the Russell 2000 – even though it now has a market value of almost $ 13 billion – more than three times the average market cap of $ 3.8 billion for. companies in the index.
Investors should therefore be prepared for more fluctuations in the Russell 2000.
“Even before the ‘Reddit revolution’ emerged, active investors have long been drawn to the small-cap equity arena,” said Lule Demmissie, chairman of Ally Invest, in a recent report.
Small businesses generally create increased volatility. “These stocks tend to increase more in good times, but it can be a double-edged sword in bad times,” Demmissie added.
She noted that the Russell 2000 has a mix of companies vying to become the next Apple (AAPL) or You’re here (TSLA), reversal stories like GameStop and speculative betting where investors swing for the fences.
Some of these companies have already taken it to the next level, with two of the largest weightings in the Russell 2000, the casino companies Penn National Gaming (PENN) and Caesars Entertainment (CZR), graduating from the S&P 500 last month.