In February 2022, the Fed’s focus shifted from liquidity to curbing runaway inflation. This transition ignited a good deal of market volatility. To date, in 2022, small caps have not been immune to this volatility. The small-cap Russell 2000 Index started the year with its worst performance since 2009. Be that as it may, history shows that small caps have had an impressive record of rebounds from declines of 20% or more from previous peaks.

Performance data from the Russell 2000 (small cap stocks) and the S&P 500 (large cap stocks) from 2007-2021 showed that small cap stocks underperformed large cap stocks over the last one (1), three (3), five 5), ten (10, and fifteen (15) years. However, when researching stock performance data over the last fifty (50) years, the results show that small cap stocks outperform large cap stocks by about one percent (1%) per year. The reason for this could be that many small-cap companies operate in specialized markets and can show earnings growth driven by favorable supply/demand dynamics of their industries. This leaves them relatively insulated from broader inflationary trends.

According to Strategas Research Partners, small-cap value has outperformed inflation over every decade dating back to the 1930s.  In contrast, small-cap growth stocks failed to do so over two decades: the 1970s and the 2000s. Additionally, Furey Research Partners LLC, pointed out that when inflation equals or exceeds 2%, then small cap value’s outperform small cap growth stocks. 

In general, because of their size,  small caps tend to be more agile than large caps. This allows them to potentially act more quickly in a volatile inflationary climate. Their historical track record shows that even when small caps are down, they are not out. Somehow the small cap always bounces back stronger than ever. 

Tickers to consider:  CEI,  FRSX, & RNAZ,

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