Abundant Cause for Hope in Small-Caps in 2023


While small company stocks suffered in 2022, there are plenty of signs of hope for the coming year.

Economic indicators remain somewhat mixed but still exhibit many signs of strength. I continue to urge investors to not give too much weight to the loudest warning cries about inflation, interest rates, and recession.

As self-normalizing systems, the U.S. economy, markets, best-run companies, and individuals have all adapted reasonably well to the challenges of labor disruptions, supply chain interruptions, rising costs, pandemic uncertainty, and media fearmongering.

Small company stocks in particular have outpaced large caps during most of the mini-rallies that the market saw in 2022. In three of the five S&P 500 rallies of the year, the S&P SmallCap 600 index rose higher than the large-cap index. In one other case, the gains of both indexes were about the same, and in the final instance (early in the year) large-caps slightly edged out small-caps.

Typically, small-caps lead the way out of bear markets, and the catalysts supporting stock market recovery in 2022, though not significant enough to support return to a full-blown bull market, were ample enough to test the market’s conviction to resume its long-term upward trajectory.

As the dust settles on a scrappy year, the S&P SmallCap 600 as of mid-December had experienced a slighter year-to-date overall decline than the S&P 500. The last few days of the year will bring a welcome close to a difficult year for many investors, but those who have focused on  investing in well-run businesses that are available for purchase at reasonable prices will likely see the rewards of their decisions in 2023.

As prime examples of the stocks we think will perform well in the months ahead, in the January 2023 issue of the SmallCap Informer, we revisit one past selection and introduce one new company. Our new selection operates in the often-overlooked industrial sector and delivers slower but more stable growth than many other small companies. A portfolio can often benefit from an assortment that includes both tortoises and hares.

Our second recommendation is a past SCI pick that is a solid fundamental performer but has seen its price oversold on economic fears. Patient investors can benefit from purchasing these kinds of stocks and weathering the short-term headwinds (if those headwinds even materialize).

Read the complete commentary and profiles of our two recommended small company stocks in the January 2023 issue of the SmallCap Informer stock newsletter.

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