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The best-performing stocks of 2021 so far: small companies

on Feb 22, 2021
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  • The Russell 2000 Index is outperforming the S&P 500 and Nasdaq index in 2021.
  • Investor demand for small-cap stocks is based on favorable exposure to the domestic economy.
  • But some caution that recent gains resulted in stretched valuations.

The best-performing stocks of 2021 are those belonging to smaller companies, according to The Wall Street Journal. In fact, small companies are outpacing large ones at the widest margin in more than 20 years.

Russell 2000 versus S&P 500

The Russell 2000 Index, a collection of 2000 small-cap stocks, is up 15% since the start of 2021 versus a 4% gain in the S&P 500 index, WSJ noted. Taking a step back, the small-cap index is beating the S&P 500 index by nearly 30 percentage points over the past six months.

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There is a simple reason why investor appetite for smaller companies has gained in recent months. Smaller companies have greater exposure to the US domestic economy compared to the more globally oriented large-cap stocks.

Small-cap companies were also more impacted by the COVID-19 pandemic and shutdowns. Ahead of expectations for a large-scale economic reopening in the coming months, investors want exposure to companies better positioned to take advantage of pent-up consumer demand.

“The stars are really lined up for small caps as an asset class this year,” Amy Zhang, a small-cap fund portfolio manager at Alger, told WSJ.

The red-hot Nasdaq index is a major reason why the markets gained over the past 10 years. But a shift appears to be underway as investors are scaling back exposure to big tech in favor of small-cap stocks.

In fact, the Russell 2000 is outgaining the Nasdaq index by the largest margin on record.

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Further momentum versus valuation concerns?

The Russell 2000’s momentum has pushed the index to trade at a premium versus the S&P 500 and Dow index based on earnings over the past year and expectations for earnings over the next year, according to WSJ. Coupled with a still-uncertain health situation caused by the pandemic, some pros are not sure small-cap stocks are attractive at current levels.

PNC Financial Services Chief Investment Strategist Amanda Agati told WSJ that in order for small-cap stocks to continue gaining, consumer spending must quickly return to 2019 levels when the economy fully reopens.

“[It] has really been a sentiment shift,” Ms. Agati told the publication. “It’s basically the market’s expectation that significant fiscal stimulus is coming to the rescue.”

Taking the other side of the small-cap trade debate is Pacific Life Fund Advisors Head of Asset Allocation Max Gokhman. He told WSJ there is “still a lot of ground” for small caps to catch up since they were in part unable to take advantage of the prior economic expansion.