After outperforming at the end of last year, small caps are off to a disappointing start in 2024.
But those who believe the long-awaited small cap rebound is already over need to consider history. Since the late 1980s, small stocks have outperformed large caps in the period between the last in a series of Fed rate hikes and the first cut in a cycle. With economists now forecasting the first rate cut in June, this potentially sets up a short-term window for small caps to rally in the coming months.
Then there’s the long-term case for small caps. Andrew J. Fleming, Vice President, Director of Research, and portfolio manager for the Heartland Value Plus Fund (and its corresponding Small Cap Value Plus Strategy), believes the coming small-cap rally could be bigger and last longer than many assume, if history is a guide. Why?
- Historically narrow markets like this — led by just 7 stocks — are unsustainable. And a smaller percentage of stocks are beating the S&P 500 today than in recent memory (see chart below).
- Small caps eventually rebound once these historically narrow markets broaden out, as was the case after the global financial crisis, the dotcom bubble, and the early 1980s recession.
- Brad says today’s market is reminiscent of the bursting of the dotcom bubble, when small value finally began to outperform large growth after years of the reverse. A year into the 2000-02 bear market, those who invested in small value gained 89% while those who bet on the S&P 500’s IT Index lost 29% over the subsequent five years.
