Chart Library
Long-Term Case for Investing in Small Caps
Small-cap stocks take on more risk than their large-cap counterparts, but for patient long-term investors, that risk may be compensated with outsized returns. Historically, small-cap stocks have averaged a 10.5% return, outperforming their large-cap counterparts by 2.5% on an average annualized basis. This has been mainly driven by their higher growth rates, domestic focus, and smaller size and scale, making them more innovative and nimble, as well as their economically sensitive nature.
Small stocks are represented by the Ibbotson® Small Company Stock Index. Large stocks are represented by the Ibbotson® Large Company Stock Index. Long-term government bonds are represented by the 20-year U.S. Government Bond. Treasury bills are represented by the 30-day U.S. Treasury bill. Inflation percentage reflects the Consumer Price Index.
Historically, Missing the Early Days of a Market Recovery Can Be Costly
Not only is timing the markets an impossible feat but could be costly from a returns perspective. As the chart below depicts, once the Russell 2000 troughs, the forward 1-year return is 63.8% but missing just the first five trading days of the recovery decreases your return by 12%, and missing the first month cuts the return in half.
Small Caps Have Rebounded Strongly Following Below Average Return Periods
Small-cap historical returns show that below-average return periods have been followed by those with above-average returns. Specifically, in periods where the Russell 2000 Index 5 year trailing return has been below the historical average of 10.5%, the forward 5 year return is higher 100% of the time and averages 14.9%.
The Spike in Personal Savings Has Disappeared
Thanks to the COVID relief programs, personal savings soared in 2020 and 2021, peaking at $6.5 trillion (about a 364% increase from historical levels). But over the past two years, those excess savings—which many have credited with helping keep the economy strong—have been spent.
Year-Over-Year Consumer Spending Trends
Consumer spending has been slightly up year-over-year (as of July 22, 2023), according to Bank of America credit-card spending data. While spending was significantly down in categories such as online electronics, furniture and gas, consumers have been paying more on dining and entertainment.
In July, S&P Equal Weight and Russell 2000 Value Indices Outperformed
In July, the S&P 500 Equal Weight Index and the Russell 2000 Value Index outperformed the S&P 500. But for this year so far, the tech-heavy Russell 1000 has led the way—up 33%.