Small-cap stocks have historically outperformed after recessions

Small-cap stocks have outperformed large caps since this year’s market low, perhaps a sign of a historical pattern.

Small-cap stocks have had a tough run versus the larger-cap cohort of the US equity market, having underperformed large caps three consecutive calendar years and four of the past five years (on the basis of the Russell 2000 Index representing small caps, and the Russell 1000 Index, large caps). After a tough start to 2020, things have improved for small caps as the initial COVID-19-related shock has begun to abate and signs of a recovery are noticeable. Since the March 18 trough, small caps have rebounded with a 43.7% gain, outpacing large caps by 11.4% (Figure 1, as of 6/19/20).

Figure 1: Small caps have started to recover this year’s market trough
Total returns of small-cap vs. large-cap stocks on a year-to-date basis

Source: FactSet Research Systems, 6/19/20. Returns are cumulative. Past performance does not guarantee future results. An investment cannot be made into an index.

As the recovery from the economic impacts of the pandemic starts, small caps may have history on their side. As shown in Figure 2, small caps have outperformed large caps coming out of the past four recessions in all but one of the subsequent 1- and 3-year periods. Small caps outperformed, on average, by 7.09% for subsequent 1-year periods and 3.25% (annualized) for the ensuing 3-year periods.

Figure 2: Small caps have historically outperformed coming out of recessions
Subsequent 1- and 3-year returns after the past four recessions

Sources: National Bureau of Economic Research, FactSet Research Systems, as 6/19/20. Past performance does not guarantee future results. An investment cannot be made into an index.

Looking ahead, we don’t claim to know exactly how the recovery will unfold, and we expect elevated volatility to continue. That said, we believe this is an exciting time for active stock pickers in the small-cap space who can identify companies with financial strength and management teams that have shown an ability to navigate through challenging environments.

In the restaurant industry, for example, Texas Roadhouse had traditionally done very little takeout business (7% of its sales prior to the pandemic1) and zero home delivery. On a relative basis, COVID-19 has favored fast-food concepts such as McDonalds, which already did most of its volumes via store drive-throughs. Instead of letting all its business go elsewhere, Texas Roadhouse’s management pivoted aggressively to expand its takeout business, offering curbside pickup and even meal kits for home cooking. With 500-plus locations for the chain, this was a tremendous logistical challenge to execute, but Texas Roadhouse pulled it off. Importantly, while its dine-in volumes have recovered solidly, Texas Roadhouse has still recently been doing over 50% of its total volume as takeout, and the company expects that percentage to settle in at 20% or higher over the long term. Its profit margins for that line of business are comparable to those for its dine-in operations.1 During a time of extreme adversity, the company rose to the challenge and has managed to expand its addressable market.

Texas Roadhouse represented 1.39% of Invesco Oppenheimer Main Street Small Cap Fund’s assets as of 5/31/20.

Holdings are subject to change and are for illustrative purposes only and should not be construed as buy/sell recommendations.


1. Source: Texas Roadhouse public documents, as of 6/8/20

Important Information

Blog header image: Alita Ong / Stocksy

Index definitions

The Russell 2000 Index is a stock market index comprising 2000 small-capitalization companies.

The Russell 1000 Index is an index of approximately 1,000 of the largest companies in the U.S. equity market.

For fund-specific risk information, visit Invesco Oppenheimer Main Street Small Cap Fund risks.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their investment professional for a prospectus/summary prospectus or visit

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. The opinions expressed are those of the author as of June 26, 2020, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Matthew Ziehl is a Portfolio Manager with the Invesco Main Street team. He is Co-Lead Manager for the Small Cap strategy, and provides research coverage to the team for real estate, business services, auto retail and lodging.

Mr. Ziehl joined Invesco when the firm combined with OppenheimerFunds in 2019. Prior to joining OppenheimerFunds in 2009, Mr. Ziehl managed small cap portfolios for RS Investments. In connection with Guardian Life Insurance Company’s acquisition of RS, he also served as managing director at Guardian Life. Mr. Ziehl has also held positions with Salomon Brothers Asset Management, including team leader for small growth portfolios beginning in 2001 and co-portfolio manager of a small-cap growth fund starting in 1999.

Mr. Ziehl earned a BA degree in political science from Yale University and an MBA from New York University Stern School of Business. He is a Chartered Financial Analyst® (CFA) charterholder.

Adam Weiner is a Portfolio Manager with the Invesco Main Street team. He is Co-Lead Manager for the Small Cap strategy, and provides research coverage to the team for the industrial sector.

Mr. Weiner joined Invesco when the firm combined with OppenheimerFunds in 2019. Before joining OppenheimerFunds in May 2009, Mr. Weiner was a sector manager at RS Investments for industrials and materials. Prior to joining RS in January 2007, he was a director and senior equity analyst at Credit Suisse Asset Management (CSAM) for over two years, responsible for coverage of the capital goods sector. Prior to CSAM, Mr. Weiner worked as a sell-side equity analyst for over eight years at both Credit Suisse First Boston and Morgan Stanley, covering the aerospace and defense sector. Earlier in his career, he worked on the internal audit team at the Dun and Bradstreet Corporation and before that served as a budget manager for the information resources division of the White House.

Mr. Weiner earned an MBA from New York University Stern School of Business and a BA degree in finance from George Washington University.

Jason Farrell is a Team Lead and Product Director for the US Core and Small-Mid Growth Equities teams.

Mr. Farrell joined Invesco when the firm combined with OppenheimerFunds in 2019. He joined OppenheimerFunds in 2008 as a product manager. Prior to that, he held positions as an equity research analyst and equity research advisor at Prudential Equity Group. Mr. Farrell has been in the financial services industry since 2006 and has worked in the product management and strategy fields since 2010.

Mr. Farrell earned a BS degree in management from Syracuse University. He is a Chartered Financial Analyst® (CFA) charterholder and holds the Series 7 and 63 registrations.

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