October 19, 2020
THREE REASONS WE LIKE SMALL CAPS
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Scott Brown, CMT, Senior Analyst, LPL Financial
Nick Pergakis, Analyst, LPL Financial
Markets have come a long way since the March lows, but we believe there may be more room for stocks to run. Given the impressive economic recovery to date and improving underlying technical and fundamental conditions, we think small cap stocks in particular may have attractive growth potential. Despite election and COVID-19-related risks, we see further gains ahead.
NOT OUT OF THE WOODS, BUT IMPROVING
The significant impact of COVID-19 on the US economy has created unprecedented levels of uncertainty for investors, with a heated election as the cherry on top for 2020. Investors have had a lot to digest since markets bottomed in March, and the virus is not yet under control, but the US economy is certainly in a much better place today than it was in the spring. While we previously have favored large cap stocks due to their strong balance sheets and resilient earnings during this recession, we highlight three reasons we have been warming up to small cap stocks.
EARLY-CYCLE ENVIRONMENT FAVORS SMALL CAPS
We believe the latest recession is over and the new economic expansion has begun. The Federal Reserve of Atlanta’s GDPNow updated its forecast to 35% gross domestic product (GDP) growth in the third quarter on an annualized basis, potentially confirming our view that the recession has ended. While we acknowledge the immense amount of uncertainty facing the economy, along with the growing risk that there may be no additional fiscal stimulus until after the election, we stop short of calling for a “double dip” recession.