Traders have witnessed a rare surge in small-cap stocks, as the Russell 2000 index recorded its strongest 50-day rally since 2020. Analysts at Bespoke Investment Group revealed that this surge is one of only 21 instances since 1979 where the market experienced a rally of equivalent or greater scope. The last comparable rally occurred in March 2019, with investors having to go back further to 2012 to find a similar experience.

For most of 2023, the benchmark Russell 2000 had remained in negative territory, while large-cap tech stocks performed significantly better. However, the situation changed in November when small-caps made a roaring comeback, resulting in a nearly 22% jump over the final two months of the year. As a result, the Russell 2000 closed 2023 with a gain of 15.1%, narrowing the gap with its large-cap peers, although it still fell behind the S&P 500.

Bespoke's analysts discovered that in the weeks and months following a 20%-plus rally in a 50-trading day span, the Russell 2000 tends to outperform its long-term average returns for all periods since 1979. While it is essential to note that past performance does not guarantee future results, this trend provides valuable insight to investors.

However, the recent 50-day rally was dampened by a pullback at the start of the new year, leading to a decline of over 3% for both the Russell 2000 and the S&P 600, another small-cap benchmark. In contrast, the S&P 500 only experienced a slight dip.

Addressing this market dynamic, UBS Global Wealth Management suggested that investors should consider adding small-cap exposure to their portfolios. Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, pointed out that the expectation of 9% earnings growth for the S&P 500 in 2024 indicates the potential for low-double-digit earnings growth for the S&P 600 small-cap index. This represents a significant improvement from the 10% decline in S&P 600 profits observed in 2023. Marcelli advised investors to complement their core quality stock holdings with tactical exposure to U.S. small-caps to capture further market upside in the event of a continued equity market rally.