History Bodes Well for Potential Small-Cap Rally

Pay enough attention to small-cap stocks and ETFs as of late and it’s easier for even novice investors to identify at least two prominent points.

First, there’s a plethora of experts and market observers noting that small-caps are historically cheap today, and that assessment is accurate. Second, that’s not doing much to help performance. The Russell 2000 Index jumped 7.57% last week. But the small-cap gauge is clinging to a meager YTD gain. It’s down 10.20% over the past 90 days.

Those data points may imply something of a split outlook for ETFs such as the Invesco NASDAQ Future Gen 200 ETF (QQQS). But consensus is building that the worst is behind small-cap stocks. Couple that with the aforementioned unusually low valuations, and QQQS could be among the small-cap ETFs worth examining over the near term.

History Could Bode Well for QQQS

QQQS isn’t an old ETF. It turned a year old last month. But the history of small-caps is pertinent when discussing the outlook for the Invesco fund. Namely, small-caps are as inexpensive relative to large-caps as they’ve been in at least 20 years. When such anomalies arise, subsequent price action by smaller stocks is positive.

“The last time relative valuations were this cheap, and sentiment so poor, was followed by an outstanding period of absolute and relative returns for small and mid-cap companies,” noted Schroders. “In the seven-year period following the market peak in March 2000, small caps rose by more than 70% compared to a rise of less than 10% for large cap stocks.”

In financial markets, history doesn’t always repeat. But it often rhymes, and if it rhymes this time around, that could benefit of QQQS. Importantly, the aforementioned history of small-caps occurred over a variety of interest rate and macroeconomic environments. That indicates QQQS could perk up even if Treasury yields don’t materially decline over the near-term.