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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.