Small Caps Are Poised for a Run
Small cap stocks have taken a beating in 2022.
And when I say “beating,” I’m not talking about a bad little run.
I’m referring to what is poised to be the worst first half of the year in the history of the Russell 2000 Index, the most popular index for small cap stocks.
From the beginning of 2022 to mid-June, this key benchmark was down a nasty 26.32%.
But while a 26% drop from an entire index is shocking, additional perspective is needed to drive home how bad this year has really been.
Prior to 2022, the single biggest first-half decline in the Russell 2000 happened in 2020, when the index dropped 13%.
This year’s 26%-plus decline is more than twice that previous record!
Furthermore, prior to 2020, the next-worst first-half decline happened in 1982, when the Russell 2000 dropped 11%. That isn’t even close to this year’s decline.
2022 has truly been some kind of awful for small caps.
That’s the bad news.
Here’s the good news…
After each of the Russell 2000’s especially rotten first-half declines in 1982 and 2020, the small cap sector rebounded extremely well.
In 1982, the Russell 2000 rebounded by 40% in the second half of the year.
In 2020, the index rebounded by 38% in the second half of the year.
Therefore, if history is any indication (and it often is), now should be a great time to buy small cap stocks.
We Have Booked Huge Gains With Small Caps Before
The last time we had a small cap collapse and setup like this one, I pounded the table for investors to buy and we saw a big win.
I made that recommendation in the spring of 2020, when the Russell 2000 had just experienced its single worst first quarter ever.
The five-year annualized return from the Russell 2000 was negative 0.2% at the time. In other words, from March 2015 to March 2020, small cap stocks did not generate a return for investors.
I saw a huge buy signal…
With a five-year annualized negative return like we had in the spring of 2020 (and like we have today), historically, the Russell 2000 has produced one-year average returns of 40.8%, three-year average annual returns of 22.1% and five-year average annual returns of 18.3%.
My call to buy small caps in 2020 turned out great for us.
The Russell 2000 went up by 83% in the 16 months from when I recommended buying small caps in April 2020 to when I said that small cap valuations were no longer attractive in August 2021.
That’s an incredible 16-month profit from a widely diversified index composed of 2,000 different companies.
And now history indicates that small caps are poised for another big bounce that we can play once more for a huge gain.
In my next Value Meter article, I’ll be reviewing the current valuation of one of my favorite small cap businesses.
Will it be extremely undervalued, extremely overvalued or somewhere in between?
Given how beaten-up this stock’s sector is, I’m guessing you know where my next Value Meter review is headed!