Home 2020 Small Cap Stocks Rising on Recovery from Virus Chaos

Small Cap Stocks Rising on Recovery from Virus Chaos


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Small cap stocks outperformed in November for their best monthly performance on record, and will remain market leaders as they will benefit from the post-chaos economic recovery” — Paul Ebeling

The Russell 2000 and S&P 600 indexes of small cap stocks are up more than 19% MTD, the biggest monthly percentage gainer for both indexes, which date back to Y 1979 and the end of Y 1993, respectively – as investors bet recent positive trial results for COVID vaccines will help the economy’s continuing recovery.

While smaller names usually see outsized price move compared to their larger issues, the small cap gains for November have nearly 2X’s the 11% gain in the S&P 500 this month.

On Monday, Moderna Inc (NASDAQ:MRDN) said it would seek US and EU emergency authorization for its vaccine after full results from a late-stage study showed it to be 94.1% effective in preventing COVID-19, joining Pfizer (NYSE:PFE) in applying for emergency use authorization.

As we got this vaccine news we started to get this rotation into the reopening side of the economy into small cap stocks, value stocks.

Small cap stocks rely less on overseas revenue and are advantaged by a heavy concentration in cyclical sectors such as financials, materials, energy and industrials that also do well as the economy begins to expand.

The more domestic exposure we have that shows an economy doing better the better the risk on sentiment.

The economically sensitive financials, industrials, materials and energy accounted for 36% of the weighting in the Russell 2000 index as of 30 September.

In the S&P 600, those 4 sectors account for more than 43% of the total index weighting.

In the large cap S&P 500, the same 4 sectors account for about 24.5% of the overall index weighting.

But, even with the recent 480% surge in smaller stocks, they are still about 19% below their long-term performance trend relative to the large cap S&P 500, giving them a lot of room to head further North.

Plus, small caps appear comparatively cheap, even with the strong November performance.

The S&P 600 is trading at a discount relative to the S&P 500 on several valuation metrics, including price to earnings, price to sales and price to cash flow.

Recent economic data has relatively even showing spending on both the consumer and business side has held up.

In their November policy meeting, FOMC discussed how the Fed’s asset purchases could be adjusted to provide more support to markets and the economy.

Northside earnings revisions for the Russell 2000 are at 20-yr highs, a development augurs well for a full economic recovery.

November has historically been the best month for the Russell 2000, and I expect December yields to be the 2nd-best monthly performance this year.

The Russell 2000 averages a 2.15% return in December, climbing 76% of the time for the highest frequency of advance, compared to an average gain of 1.47% for the S&P 500 and a 73% frequency of advance.

Stocks are in the early stages of a new Bull cycle and investors will buy in because money is cheap and economies will return to pre-chaos days faster than expected.

Have a healthy day, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.