For the first eight months of 2017, small-cap stocks underperformed.
From January through August, the S&P 600 Small Cap Index, the most accurate measure of small-cap stock performance, was flat. This month? It’s up 6.7%! Compare it to the mere 1.3% run-up in the S&P 500, and it’s all the more impressive.
Why the sudden surge in small caps? For that, I defer to Tyler Laundon, our small-cap investing expert and chief analyst of our Cabot Small-Cap Confidential advisory. Here’s his explanation.
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“There are a lot of reasons,” Tyler says. “The potential for tax reform is one. Then there is a strengthening U.S. dollar, which can be seen as good for small caps (since most do business strictly in the U.S). Then there is the relationship between a decent earnings season, the turning over of forward estimates to include the first two quarters of 2018 (i.e., Q2 2018 replaces Q2 2017, so there is a jump there, which reduces the forward P/E), and the likelihood that small-cap stocks became oversold during the mid-August swoon, resulting (along with the forward earnings jump) in a more attractive valuation. Oh, and then another big macro reason—U.S. gross domestic product (GDP) was just increased to 3.1% for April-June, up from 3.0%. Not a big increase, but it’s an increase nevertheless.
“I’d say all those things are pretty bullish. Then, of course, there’s the fear of being left behind as small caps roared back, and then broke above their year-to-date trading range (see chart below). That technically bullish signal probably drove demand as well.”
Now at all-time highs, small-cap stocks have plenty of momentum after a five-week rally with almost no letup, beginning with the mid-August bottom Tyler mentioned. With third-quarter earnings season right around the corner, that could further extend the rally in small caps, with a stronger U.S. dollar helping to boost smaller companies, most of which do all their business domestically.
From a sector perspective, energy, materials and industrials have been the standouts, with small-cap stocks in each of those three sectors outperforming their large-cap stock brethren by a wide margin over the past month-plus. Given the momentum, that makes small-cap energy stocks, materials stocks and industrial stocks quite enticing at the moment.
But if you really want to ride the momentum in small caps, I’d recommend taking out a subscription to Tyler’s Cabot Small-Cap Confidential investment advisory. Tyler’s ten current small-cap stock recommendations have an average return of 35.4%, with an average holding period of less than a year! Considering that small caps were flat for the year until September, I’d say that’s a darn good track record!
To sign up for Tyler’s small-cap advisory, click here.
Even if you don’t sign up now, it’s high time you pay close attention to small-cap stocks. When small caps get going, they tend to rise faster than the large caps or blue-chip stocks with which we’re all familiar. If you want to profit from the current small-cap rally, it’s best not to wait!
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