Small-cap stocks have suffered more than their larger counterparts this year, with the small-cap Russell 2000 down 31.8% from its record highs last November compared to the S&P 500, which is down 23.4% since January, according to an article in Barron’s. Small-cap stocks get hit harder by the same things that affect large-cap stocks: inflation, rate hikes, and recession concerns. But small-caps could still outperform once investors put aside their fears and focus on the better days that probably lie ahead.
The worst three first half starts of the year for the Russell 2000 were in 2020, when it dropped 13%, 1982 when it fell 11%, and then in 1984 when it declined 9.5%. All three times, the index climbed back up in the 2nd half: 38% in 2020, 40% in 1982, and 2.4% in 1984. In 2022, the index’s decline has been steeper than the S&P 500’s, resulting in a “relative oversold” condition, according to John Roque of 22V Research who is cited in the article. In addition, the index’s value has been squeezed down to just half a percentage point above the S&P 500’s, where it is usually about 5 points. Both of these occurrences indicate that there could be a near-future upside for small-cap stocks, even in spite of a recession.
And if the economy does avoid a recession, small-caps will be especially appealing. Many analysts are predicting that the Russell 2000 ETF’s aggregate earnings per share in 2023 will gain 20% year over year—more than double than what’s expected of the S&P 500. For those who don’t believe a recession is coming, small-cap stocks would be an attractive purchase right now, the article contends.