Like ketchup coming out of a repeatedly tapped glass bottle, it seems small cap stocks are finally rewarding investors in the fourth quarter of 2020.
Through September 30, 2020, it had been three years without return for small cap stock investors:
As if that weren’t frustrating enough, the S&P 500 was up over 40% during the same time period, making small cap’s poor performance all the more disappointing on a relative basis.
Since September 30, 2020, small cap stocks have gone wild:
A refrain I’ve adopted from Ben Carlson of Ritholtz Wealth Management is that “returns are lumpy”. Over the last three years, small cap stock returns couldn’t have been any lumpier – nearly all the benefit came in just the last three months.
As far as I’m aware, there weren’t any signals or signs to pile into small caps in advance of this wild move, just as there weren’t any warnings back in the fall of 2017 to suggest small caps wouldn’t make money for three years.
This is just how investing works. Patience is usually rewarded, but the timing and magnitude of the reward cannot be known in advance. Those who are willing to bear that uncertainty get the benefit, and when they do, sometimes it comes all at once.