A Major Small-Cap Rally Is Just Beginning By Brett Eversole
It has been a fantastic year for the stock market. But not all stocks are soaring... Small-cap stocks have been mostly left out of the rally. Until earlier this month, they were up just 1% for the year... during a time when large caps soared nearly 20%. We just witnessed a major reversal, though. Small-cap stocks jumped 6% in the second week of July. It was their best week of gains since last November. Not only that, but according to history, the rally should continue... And as I'll explain, we could see gains of 18% over the next year.
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If you've been watching the market in recent years, you might have decided that large caps are the only stocks worth owning. This group has led the U.S. market over the past 15 years. And over the past five years, the largest stocks have beaten just about everything else. Given the huge outperformance from the big players, it's no wonder many investors have lost interest in smaller companies. But according to history, now isn't the time to give up on small caps. It's never wise to go "all in" on any kind of investment. You can do a lot better putting some of your portfolio into the unloved parts of the market... because once folks have thrown in the towel, prices tend to start rising. Small-cap stocks are likely nearing that point now. The Russell 2000 Index – a benchmark for small caps – is up less than 5% over the past three years. The S&P 500 jumped 32% over the same period. But now, the Russell 2000 has finally broken out. It jumped 6% two weeks ago. Take a look... This was a major rally for small-cap stocks after a whole lot of nothing in 2024. And the Russell 2000 hit a multiyear high in the process. The index has jumped 6% or more in a week just 45 times since 1979 – about once per year. And importantly, it tends to keep soaring after those rallies. Take a look... 
Small caps have been good to investors over the long term. The Russell 2000 is up 9.1% annually over the past 45 years. But you can dramatically improve those returns if you buy after a one-week spike like we just witnessed... Similar setups led to 7.9% gains in three months, 14.2% gains in six months, and 18.1% gains over the next year. That's a massive improvement over the normal gain for small caps. And these situations led to profits 75% of the time over the next year. Small caps are still massively underperforming large caps. But the recent jump might be a sign of changes to come. And while large caps will likely keep rising, small caps could rack up even bigger gains in the months ahead. This is a market you want to consider right now. And if you're looking to take advantage of the recent jump, the iShares Russell 2000 Fund (IWM) – an exchange-traded fund that tracks U.S. small caps – could be one way to add exposure in your portfolio. Most folks have given up on these stocks. But according to history, now is the time to buy. Good investing, Brett Eversole Further Reading The presidential election is heating up – and current events have spooked investors. One popular fear-based indicator recently surged higher. According to history, though, this "jolt of fear" isn't a reason to sell... Learn more here. "The attention and number of eyeballs on today's biggest companies is mind-boggling," Jeff Havenstein writes. But you might find the best potential winners elsewhere – specifically, in overlooked small- and mid-cap companies... Read more here. |
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