In Search of Upside: Finding Opportunities in Small Cap Growth

Although the worst of Covid-19 has hopefully passed, its impact on the markets remains front and center. The pandemic has been wreaking havoc on the economy for nearly two years, resulting in rising inflation and potentially higher interest rates, and it appears increased market volatility may continue in the near term as investors sort out the effects of new variants.

As a result, we have increased our focus on high quality companies trading at attractive prices, as we believe they are more likely to outperform even in challenging environments. Additionally, we have been looking at non-technology businesses that are successfully participating in the digital revolution, as we believe the market does not fully recognize their potential.

Small Caps Marked Time In 2021

As the below chart shows, small cap growth stocks began 2021 on the heels of an historic bull run, which largely explains their tepid performance last year.

Russell 2000 Growth 2 Year Returns

Source: RIMES

The rally eventually lost steam in February, as investors were confronted by multiple economic headwinds, including continuing Covid issues, rising inflation, supply chain disruptions, labor shortages, and shifting Fed policy. Given the uncertain backdrop and elevated share prices, sentiment never recovered in 2021, resulting in a sawtooth pattern of fits and starts for the entire year.