The year 2016 will long be remembered for the great turnaround of small cap stocks. Small-cap stocks clearly emerged as the winners of 2016 after an impressive recovery in the second half of the year helped the major U.S. benchmarks to end the year on a strong note.
Factors including a Trump-induced rally, improving U.S. economy in the latter half of the year and a strong rebound in oil prices boosted stocks this year and are speculated to give a further boost in the near future. In this encouraging backdrop, investing in fundamentally strong small cap stocks might emerge as one of the lucrative options for the next year.
Performance of Small-Cap Stocks in 2016
After a tough time last year, small-cap stocks made a remarkable recovery this year. The Russell 2000 Index, which is broadly considered for measuring the performance of small-cap stocks, increased 18% this year following a 6.5% decline last year. In fact, this was the best yearly performance of the index in three years. It has also easily outperformed other major U.S. benchmarks.
The index’s gains this year were significantly higher than returns of 12.6%, 9.8% and 7.6% posted by the Dow, S&P 500 and Nasdaq, respectively. Moreover, the small-cap index significantly outpaced the major U.S. indexes during the post U.S. President election period. While the Dow, S&P 500 and Nasdaq gained 8.5%, 5.5% and 5.2%, respectively during the said time frame, the Russell 2000 index surged 14.3%.
Performance Comparison of Russell 2000 with Dow, S&P 500 and Nasdaq
Factors Boosting Small-Cap Stocks
Improving U.S. Economy
Small-cap stocks are believed to derive higher gains from an improving economy compared to their large- and mid-cap counterparts. Thus, it is likely that strong recovery witnessed in the U.S. economy during the second half of this year has played a vital role in boosting the small cap stocks.
Encouraging economic data including a two-year high GDP growth rate during the third quarter, 12-year high consumer confidence level, encouraging labor market conditions and expanding manufacturing and services sector also indicate that the economy is on a strong footing. This favorable backdrop also led the Fed to hike key interest rate for the first time in nearly a year.
