As volatility dies down, investors look to small-cap stocks

The Russell 2000 hit a new high on Tuesday this week and is on track for its best month ever, fueled by a boom in small-cap stocks. US small caps are also ‘having a moment,’ according to S&P Global Market Intelligence, with the S&P SmallCap 600 climbing 16.6 percent this month through to November 19 – cleanly beating the S&P 500’s 9.5 percent rise.

This small-cap rally comes in a month where, after months of uncertainty, the US election was concluded and it was announced that a number of vaccines were at least 90 percent effective against Covid-19.

Prab Sagoo, director at Nasdaq IR Intelligence, tells IR Magazine that investors were ‘quick to adjust their exposure’ as the landscape shifted.

‘As a result of the changing dynamics following not only the realignment of US politics, but also the substantial and consistently bullish headlines around potential coronavirus vaccines, market participants have been quick to adjust their wider exposure to what they think will benefit them most in the short and medium term,’ he says.

‘One of the most substantial shifts has seen risk tolerances increase while volatility has died down notably. The other has been a move toward value names and away from the higher growth and high-momentum areas of the market that had performed so notably well over the past year.’

This reduction in volatility – and increased appetite for risk – has a big impact on small-cap stocks, notes Sagoo, making ‘for more confident decisions in names that may not have attracted the same level of interest a few months ago.’

Small-cap firms need to be proactive and take advantage of this interest, he continues, as the need to capitalize on the favorable environment cannot be understated. He also warns companies against wasting IR and C-suite attention on names that are not likely or willing to take a position at the moment – or those that are ‘just not a fit for the business despite the current environment’s latest headlines’.

Sagoo further notes that while the record-breaking small-cap rally might be making headlines, the challenges facing small-cap companies have not gone away, citing changes on the sell side, from both a structural and a regulatory perspective. ‘Proactivity tied to external outreach, the old-fashioned way or via technological solutions, is key to overcoming some of those challenges,’ he concludes.