Small Caps Leading

Since the stock market lows of mid-March 2020, Small-Cap Stocks have been on a tear relative to Large-Cap Stocks. To explore the point, we graphed the following ratio: VB / VV with 10-years of data. VB is the Vanguard U.S. Small-Cap ETF and VV is the Vanguard U.S. Large-Cap ETF. The ratio demonstrates their relative performance.

VB / VV Over 10-Years

Since the closing low on 23 March 2020, the VV U.S. Large-Cap ETF has appreciated 76.8% (to 12 January 2021). The VB U.S. Small-Cap ETF has appreciated by 112.3%. The difference is stark: Small-Caps have out-performed Large-Caps during the market recovery by a whopping 35.5%.

Small Caps Out-Pacing Technology Stocks Too!

VB / QQQ Over 10-Years

Next, we compared the U.S. Small-Cap ETF to the tech-heavy NASDAQ-100 Index ETF from Invesco (QQQ), over the same period. The results may surprise you! Small-Cap Stocks have outpaced the tech-heavy NASDAQ-100 Index by 27.5%. Since the close on 23 March 2020, the QQQ is higher by 84.8% (vs. 112.3%).

Exchange-Traded FundPerformance:
3/23/20 – 1/12/21
VB – Vanguard U.S. Small-Cap112.3%
VV – Vanguard U.S. Large-Cap76.8%-35.5%
QQQ – Invesco NASDAQ-10084.8%-27.5%
Small-Cap Stocks have led the way higher since the lows of 23 March 2020.

On the way to the lows in March, investors suffered the swiftest sell-off in modern history: Small caps sold off 42%, Large-Caps sold off 34% and Tech Stocks sold off 28%, all in a month. If you stayed invested, you made-out OK. From the highs in February 2020 to yesterday’s close, QQQ (NASDAQ-100) is higher by 33.2%, while VB (Small-Caps) is higher by 23.0% and VV (Large-Caps) is higher by 16.2%. While it pays to stay invested, the swings can be a challenge.

Finally, we calculated the Volatility of the 3 ETFs over the past 12-months (252 days) and 5-Years (1,260 days). The recent volatility figures are nearly twice the long term averages, confirming that the past year has truly been a wild ride!

Exchange-Traded FundPerformance:
Feb. 2020 to 1/12/21
12-Month Volatility*5-Year Volatility*
VB – Vanguard U.S. Small-Cap-42.0%39.3%22.0%
VV – Vanguard U.S. Large-Cap-34.3%34.4%19.1%
QQQ – Invesco NASDAQ-100 -28.0%35.8%22.0%


12-Month and 5-Year volatility are the annualized standard deviation of daily returns over the periods.

All performance figures are Total Return, and assume the re-investment of dividends.

Congress Pays-Up!

On Monday, in a 359 to 53 vote, the House overwhelmingly passed a fifth-round spending package. Monday night, the Senate approved the measure in a 92 to 6 vote. The president is expected to sign the legislation on Tuesday.

After six months of negotiations, Congress reached an agreement on a $900B coronavirus spending package. Just shy of $1 trillion, it is the second-largest economic relief bill in the nation’s history. Passed in March, the CARES Act totaled $2.2T.

The legislation includes $600 in direct payments to individuals, $300 per week of enhanced unemployment benefits, and funding for small businesses, vaccine distribution, food assistance, education and child care. It also covers rental relief, extending the nationwide eviction moratorium through January 31, 2021.

Monday’s market action was extremely volatile, with a 2.0% sell-off in the morning, which was followed by a 1.6% rally to the close. The S&P 500 Index was lower on Monday by 0.4%.

JPMorgam Makes the Bull Case for a Bullish Wall St.

In a note circulated over the weekend, JPMorgan Chief US Equity Strategist Dubravko Lakos-Bujas, stated,

The equity market is facing one of the best backdrops for sustained gains in years. After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, US Election uncertainty, etc.), the outlook is significantly clearing with the business cycle expanding and risks diminishing…”

As reported by Yahoo Finance, the average Wall Street call for the S&P 500 Index in 2021 is 4,150. From Friday’s closing value of 3,709 that represents a rise of 11.9%. JPMorgan’s call for 2021 is significantly higher at 4,400, a rise of 18.6%. The JPM strategist suggested a range of 4,200 to 4,600 around his target.

The JPMorgan strategist cited several assumptions that underlie his thesis: 1. World Central Banks continue to supply easy money; 2. Vaccine delivery runs smoothly in the US; and 3. the US ends-up with a divided government after the run-off elections in Georgia.

The S&P 500 is a capitalization-weighted index of stocks price performance in the US.

Past performance in not a predictor of future results.

The opinion of the strategist cited above is his and his alone.

Small-Caps Take-Off!

Over the past 10-years, small-cap stocks have had a tough run versus the large-cap stocks. The graph below shows the ratio of the Vanguard Small-Cap ETF (VB) divided by the Vanguard Large-Cap ETF (VV) over 10-years, or 2,515 trading days. Small-cap have underperformed for three consecutive calendar years and five of the past six calendar years.

After a tough start to 2020, small-caps have taken-off, as the initial COVID-19-related shock has begun to abate and signs of economic recovery are a bit more visible. Since the March 18 trough, small-caps have rebounded with a 77.6% gain, eclipsing large-cap’s 52.3% gain by 25.3%.

Small-Cap Stocks / Large-Cap Stocks for 10-Years (2,515 trading days)

For the past 3-months, small-cap stocks have outperformed large-cap stocks by more than 9%. The graph below shows the ratio of the Vanguard Small-Cap ETF (VB) divided by the Vanguard Large-Cap ETF (VV) over 66 trading days.

Small-Cap Stocks / Large-Cap Stocks for 3-Months (66 trading days)

Looking ahead, we cannot predict precisely how this recovery will unfold, but we suspect that the rally in stock prices has further to run (our call in March was 3Q22). We expect volatility will abate somewhat, as the economy returns to a new-normal. This will very likely be an exciting time for active stock pickers in the small-cap space.

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