Wall Street Weekahead: Small caps join market rally but pandemic could derail them

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U.S. small caps joined in the broad market rally in the days after Election Day as investors priced in the likelihood of a divided Washington with Democrat Joe Biden president and Republicans maintaining their Senate majority.

A U.S flag is seen on the New York Stock Exchange in the Manhattan borough of New York City, following the 2020 U.S. presidential election, New York, U.S., November 6, 2020. REUTERS/Carlo Allegri

However, smaller companies remain likely to bear the brunt of the pandemic, which is reaching record levels in the United States. Those worries are reflected in small-caps underperformance since Election Day. The Russell 2000 index of small cap stocks is up 2.6% since Nov. 3, a little more than half of the 4.2% gain in the large cap S&P 500 index over the same time. The underperformance mirrors that of the last five years, in which the Russell is up 38.2% compared with a 67% jump in the S&P 500.

“The implications of the ongoing second COVID-19 wave in Europe and the third wave in the U.S. remains uncertain and the results of the vaccine trials by the end of this month remain an important catalyst,” analysts at Barclays wrote in a note Thursday, recommending that investors remain hedged against a steep decline in U.S. small-caps.

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