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.