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Small-cap stocks don't get much attention, but in 2013 they've certainly outshined their larger brethren.
While the financial media focused its daily attention on The Dow Jones Industrial Average, and to some extent the Standard & Poor's 500 Index, the best stocks to buy in terms of largest gains were in the Russell 2000 index.
The performance of small-cap stocks this year has been nothing less than remarkable.
The Russell 2000, the domain of small-cap stocks, is up 32% in 2013, far outpacing the 19% gain of the Dow as well as the 23.4% gain of the S&P 500.
Since the current bull market started in March 2009, small caps are up 226% compared to 138% for large caps.
Strong gains among small caps frequently presage more robust economic activity and strong gains in the broader market.
Over the past 34 years, such outperformance by small-cap stocks foreshadowed faster growth in the economy and an extension of the bull market three out of four times, according to Bloomberg News.
Actually, that's part of the answer to why small-cap stocks have done so well this year.
Because smaller companies tend to derive most or all of their profits from U.S. sales, they make a good bellwether for an improving U.S. economy. The average Russell 2000 company gets 84% of its revenue from the United States, compared to 55% for the typical DJIA company.
"U.S. small-cap companies generate significantly less revenue outside the U.S. than do U.S. large-cap companies. This close connection with U.S. economic improvement has likely been an important component of small-cap stocks' outperformance year-to-date over large-cap stocks, as reflected by the Russell U.S. Indexes," said David Koenig, investment strategist for Russell Indexes.
Why Small Caps Are the Stocks to Buy Now
Another positive sign for investing in small-cap stocks: Russell 2000 companies are beating earnings estimates at twice the rate of DJIA companies, Bloomberg News says.
About the Author
Dave has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.