Top of the markets: smaller companies continue to outperform

In both the US and Europe, small company indices continued to race ahead in January, while large caps lagged.  

While the year initially started well for US equities, a sharp sell-off near the end of January resulted in the main US stock market indices ending the month in negative territory. The S&P 500 lost just over 1%, while the Dow Jones Industrial Average ended the month down by almost 2%.

However, 2021 saw a much more positive start for smaller stocks. The S&P 400 index, which tracks mid-cap companies, ended the month with a reasonable 1.5% gain. Meanwhile, the S&P 600, which tracks small-cap companies, rose by over 6%.

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The outperformance of mid and small-cap companies is a continuation of the economic “reflation” theme that’s been playing out since the fourth quarter of 2020. Put simply, the idea is that we are now seeing the start of the post-Covid economic recovery, boosting stocks that are more sensitive to economic performance. Mid and small-cap stocks generally fit into this camp.

This was also evident when it came to S&P 500 sectors. The top-performing sector was energy, with a gain of 3.9%, comfortably outperforming the broad index. More economic activity means more demand for energy, which bodes well for the fortunes of energy companies. Other cyclical sectors such as consumer discretionary and real estate also produced positive returns.

However, sector performance did send some mixed signals. Materials and financials both underperformed the index, despite these two sectors often being seen as cyclical. Among the top performers was the non-cyclical healthcare sector, which returned 1.4%. Information technology also slightly outperformed the wider index, losing 0.9% compared to the S&P 500’s 1% loss.

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It was a similar story in Europe, with initial gains at the start of the year being pulled back before the month’s end. The S&P Europe 350 saw a loss of 0.8%. The UK also saw a slight pull back in January, with the S&P United Kingdom index losing 0.6%.

However, as with the US, mid and small caps lead the way, with the S&P MidCap index gaining 0.2% and the S&P Europe SmallCap 1.5%.

On sectors, Europe also sent mixed signals. The highly cyclical energy sector was the best performing, gaining 2.7%. However, that was followed by the non-cyclical information technology sector, which gained just over 2%. Materials, communication services and healthcare also all produced a positive return.