Posted March 04, 2021
By Ray Blanco
Why Small Stocks Are the Best Trade of 2021 in Six Charts
Small-cap stocks are where you want to be right now.
The Russell 2000 Index is up 40% in the last six months, compared with a gain of just 11% for the large-cap S&P 500.
The massive move higher in small stocks isnt random
And theres much more upside where that came from.
In todays video, I show you why small caps are still the BIGGEST trade of the year in six simple charts
(Note: I promised you on tape that Id get through the six charts in six minutes. Sadly, I ran over but the extra content will be worth your time.)
Click the image below to get started.
Chart #1: Small Caps Smoke Large Caps in the Long RunOur first chart shows why I love small caps so much.They smoke large-cap stocks like Apple, Facebook, Google and other companies with $500 billion or even $1 trillion in market value.Large-cap stocks get the lion's share of attention in the financial media, but they dont provide the lion's share of returns for investors.As you can see here on this chart, which is a 20-year chart of the Russell 2000 small-cap benchmark index versus the S&P 500, there's massive outperformance here and it's not even close.As a reminder, small-cap stocks are those that have market capitalizations of $2 billion or less.With small caps, you have a lot of great stories that arent being told because all the attention goes to large-cap stocks.But these small stocks are where the big explosions happen.You can take a look on any given day in the stock market. The major outperformers arent typically the big stocks; they're the small ones.But you rarely hear that story.So myth debunked.Over the last 20 years, youve got a 377% return in small caps versus 214% in large-cap stocks.
Chart #2: Small Caps Offer Bigger Short-Term GainsSmall-cap stocks also offer you the best possible returns compared with large caps in a one-year period.From Jan. 1 to Dec. 31, the best return ever recorded for the Russell was 97%, versus a mere 70% for the S&P 500.If you take a look here at the other periods like one week, one month, three months or six months, the Russell beats the S&P in every period and its not even close.So just to piggyback on the last chart about the long term, small caps are also great for the short term.
Chart #3: Small Caps After a RecessionThis is where things get exciting.In the one-year period following a recession (like the one we just saw on June 8, 2020), small-cap stocks post a 28% return versus a 16% return for large caps.And 90% of the time going all the way back to the early 1950s, small caps outperform large caps.And again, when you take a look at some of these returns, its not even close.After the 2009 recession, we saw a 26% return for small caps versus 13% for large caps. And in 1980, we saw a 27% return versus an 11% return.And we've got three more months until we hit the one-year anniversary of last years recession. But youve got plenty of time here.Small caps are where you want to be coming out of a recession and a bear market.
Chart #4: Small Caps Soar as Inflation RisesGot fears? A lot of people do particularly analysts.Theres not a day that goes by that I don't hear about fear.Somebody is always talking about inflation rising and how it could affect stocks. It could or could not.All I know is that people have been calling for higher inflation for the better part of 15 years. And thanks to technology, we just haven't seen that happen.I'm not an economist, so I'm not going to bore you with the details.But here's what I do know as a trader of small caps. They're not afraid of inflation. In fact, they do very well during periods of high inflation.Take a look here at this chart. Again in the late 1970s and early 1980s when you had the last period of real hyperinflation, small caps soared.As you can see, the arrow that points up is a period when small caps outperform. And when the arrow points down, that's when large caps outperform small caps.Again, youve got outperformance here in the 1990s when we saw a real economic boom and inflation. Small caps are still outperforming.The early 2000s are another period when you had small caps outperform.The last period of real underperformance for small caps was in the late 2010s.And we'll see that on another chart.But we're seeing inflation expectations rise. And we can expect to see small caps rise alongside them.
Chart #5: Small Caps Outperform as Interest Rates RiseWorried about interest rates rising? It's another headline youll see these days.The fear is that the Fed may have to raise interest rates sooner than expected because of runaway inflation.I don't see that being the case. But let's say for the sake of argument that youre someone that thinks that. Well, small caps are still your friend.This chart shows you the average 12-month change in small caps versus large caps when the 10-year Treasury is rising.And when we've got rising Treasury rates, the Russell 2000 still beats the S&P.When you look at 10-year Treasuries versus 3-months, Treasuries still see outperformance.So as interest rates rise, you still want to be looking at small caps instead of large caps.
Chart #6: Small Caps Break OutIf you watch my videos, you know that I'm very serious about breakouts. I love both breakouts and small caps.And when you get both together whew! Now we're cooking with gas.So take a look at this chart.Boom, we were looking at the ETF that tracks the Russell 2000. And this chart goes back to roughly 2004.And this indicator you see here at the bottom of the screen, thats the ratio of the Russell 2000 versus the S&P 500. And put very simply, it just measures the price of the Russell 2000 divided by the S&P 500.You see that anything above the zero line is outperformance. Anything below the zero line is underperformance against the S&P.We see a downtrend start to form in outperformance.That's not saying theyre underperforming, but there's a downtrend in place.And you see that persist basically from 2015 to 2020.We have a period of small caps underperforming large caps in a big way there. But you see a breakout here highlighted in red for the ETF.We have a big breakout here in 2021 breaking that downtrend.And we are about to see a period of outperformance over the S&P.So not only do we have a beautiful breakout. It's also supported by breaking to the upside in relative performance and in a good position relative to large caps, which have run up a ton.You're seeing Facebook, Apple, Google sell off. But small caps are still moving higher.I think this could continue well into 2021, 2022 and even 2023.You've got a triple play, basically a breakout of outperformance...You've got small caps rising alongside inflation expectations...And let's say for instance the Fed does have to raise interest rates. Small caps still outperformed.So youve got a lot to love in small caps right now.And if you like what you see here, stay tuned.I'm going to be highlighting some great small-cap opportunities in charts here over the next couple of weeks.You don't want to miss them!Do yourself a favor by taking a look at small caps and forgetting about large caps for a while.Small caps are going to be your key to a very successful 2021 from here on out.Sincerely,Jonathan Rodriguez