After years of frustrating false starts, smaller companies are finally consistently outperforming. It’s time to win big by betting small, writes Alec Young, contributor at MoneyFlows.
For one thing, small cap stocks are cheap and growing faster than mega-caps. But the bull case also includes interest rate stabilization, a strong seasonal set up, GDP trends that favor smaller-sized firms, a superior earnings trajectory, and still hugely discounted valuations.
Let’s start with a look at history around the midterms. On Oct. 20, we told you about the S&P 500 Index (^SPX)’s “midterm miracle.” Believe it or not, small caps have an even more bullish story to tell.
Six months before a US midterm, small caps have fallen 7.6% on average since 1962. But the strongest six-month stretch for small caps starts in November of midterm election years and runs through April of the following year. Small caps win big, averaging 21% gains over this juicy stretch with 15 of the past 16 observations green.
Then there are the massive inflows. From Oct. 4 through Nov. 4, a stunning 76% of our 1,737 discrete equity inflows have been in companies with market caps below $50 billion.
The macro and the money flow backdrop both favor ascendant small caps. That’s a powerful one-two punch!
