Large cap stocks outperformed in 2021 — will small caps rebound in 2022?
Compared to last year when nearly anything purchased at the bottom of the market went up — investing in 2021 was a lot more challenging. ~93% of stocks in the S&P 500 went through a 10% correction in 2021.
According to Ben Carlson of Ritholtz Wealth Management:
- 1 out of 3 stocks are down in the past year.
- 1 out of every 5 stocks is down over 20% from their 52-week highs.
Despite these drops, in the past year, the Russell 3000 — an index consisting of 3,000 of the largest US stocks — is still up 22%.
Over the past 12 months, it:
- Paid to go big: The 20 largest companies were up 35% and only 3 of these were down.
- Paid to go even bigger: A portfolio of the 5 of the largest companies — Apple, Microsoft, Alphabet, Amazon and Tesla — was up 42%.
The time to go small: Small caps — companies with $300M-$2B in market capitalization — have underperformed in 2021 — but they tend to perform better when:
- Inflation is high: In the past decade, small-cap stocks performed better when high inflation was expected — according to CME group (via WSJ).
- Economy reopens: Small-cap stocks are more sensitive to market cycles — recovering as the economy opens up.
The ETF way: iShares Russell 2000 ETF (NYSE:IWM) — an index consisting of 2000 of the smallest stocks in the US — is only up 13% in 2021.
With the anticipated market conditions for 2022, we could see a reversal of the small-cap stocks’ fortunes.