U.S. Small Caps After a Downturn: Stock Declines in Early 2020 Likely Created Attractive Valuations


To get a handle on the state of U.S. small caps after the pandemic-induced losses in early 2020, we start by looking at the performance of stock prices: How did the U.S. small-cap group perform relative to other market-cap groups during the several years through 2019? How did they perform during the downturn in February and March 2020? And how did they perform for the entire 2020 year-to-date period through April?

Then, we ask, what does history tell us about the potential performance going forward? And what are the overall characteristics in each market-cap group? Finally, we address, how are the Wasatch U.S. small cap strategies positioned today—and why?

Our conclusion is that our successful, long-term approach still makes sense: We invest in high-quality small-cap companies with great management teams that are able to rapidly grow sales and earnings in markets with significant headroom to expand.


For the five years ended December 31, 2019, the large-cap S&P 500® Index rose a cumulative 73.86%, compared to 54.07% for the S&P MidCap 400® Index and 48.49% for the small-cap Russell 2000® Index. These returns are depicted in Figure 1 below.

What this means is that—despite small caps’ long-term outperformance of mid caps and large caps—small caps were the relative laggards leading up to the pandemic.


Now let’s look at 2020, which includes market performance amid the Covid-19 pandemic. As you can see from Figure 2 below, small caps fell in near lockstep with mid caps—but both groups dropped to a significantly greater extent than large caps. Even more disappointing for investors in companies with lower market capitalizations is that through April 30, small caps and mid caps had recouped less than half of their 2020 losses—while large caps had recouped almost 60% of their losses.

As a result, for the year to date through April 30, 2020, the large-cap S&P 500 Index was down only -9.29%, while the S&P MidCap 400 Index was down -19.73% and the small-cap Russell 2000 Index was down -21.08%.

It’s not surprising that small caps and mid caps declined more than large caps through April because stocks in lower market-capitalization ranges are generally perceived as riskier. What is somewhat surprising is that, for the five years presented in Figure 1 and the four months presented in Figure 2, stocks in the lower market-capitalization ranges experienced the worst of both worlds—generally performing less robustly in rising market environments and more poorly in falling market environments.