How can investors position themselves to potentially profit from an eventual stock market recovery? We believe that small caps may outperform their larger peers on the way up.
- Small caps have historically led market recoveries. Looking at the past three recessions from the market low and forward twelve months, the Russell 2000 Index has risen about 38% while the S&P 500 Index has only returned 22%, as indicated in the chart above.
- While small caps have dramatically underperformed year to date as investors have sought out the relative safety and liquidity of larger caps, their valuations have become depressed, making them potentially attractive.
- Small caps have underperformed so much that while they typically trade at a premium to large caps, they currently trade at a discount. That discount is the lowest it has been in two decades based on price-to-trailing earnings.
- Investors seeking to play offense in the eventual recovery may want to consider high-quality small caps.
Download Alger on the Money