November 17, 2023
“Will Small-Caps Outshine Bigger Indexes in Overbought Markets?
In recent months, the three major U.S. equity indexes - the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite - have set multiple all-time highs despite the ongoing economic uncertainty caused by the effects of the coronavirus pandemic. While these records are being celebrated by many, some investors have expressed concern that the indexes are now overvalued and in a state of overbought conditions. When investing, it can be beneficial to seek out exactly what type of stocks to invest in when the market appears to be at a peak.
The truth is, when markets have become overbought, it can be hard to find deals. This is where small capitalization stocks can come into play. Small-cap stocks are securities of companies with relatively small market capitalizations, and can usually be purchased at prices much lower than the larger, blue chip stocks that dominate the market.
Not only do small-cap stocks often serve as a bargain in overbought markets, but they can also be a great hedge against a potential pullback. As the major indexes begin to cool off, small-cap stocks may still continue to overtly perform, as large investors look to flee the market and small investors look to take advantage of the discounts that market volatility can provide. Furthermore, small-cap stocks have a reputation of being highly cyclical in nature, meaning they trend to move faster than the larger counterparts in the market, meaning they can potentially provide the investor with a better opportunity to capitalize on upswings in the market.
Lastly, the risk associated with investing in small-cap stocks are oftentimes significantly lower than that of larger stocks, making them a less volatile option for risk-averse investors.
For risk-takers and bargain hunters alike, small-cap stocks offer an interesting investment opportunity when major indexes are testing their overbought conditions. Small cap stocks can provide a potential play on overvalued stocks, a hedge against the market, a chance to capitalize on upswings, and a lower risk profile - all at great prices. So, if you're looking to beat the major indexes and potentially earn a return in overbought markets, small-caps could be a great option for you.