Chart talk: How the retail investing tilt to small-cap stocks could pay off

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It could be a Summer of Love for retail investors that are switching from large-cap to small-cap stocks of late.

The market is seeing a period analogous to the late ’60s, where small-caps outperformed, according to BofA Securities.

Retail participation makes of 20% of the large-cap market (SPY) (IWB) and 30% of the small-cap market (NYSEARCA:SLY) (NYSEARCA:IWM). While small-caps were favored by a much greater margin in early 2021, making up nearly 50% of the market during the meme craze, the gap narrowed to an equal split late last year.

In 2022, though, retail investors have again moved to small-cap equities.

With inflation at four-decade highs, small-cap companies have mentioned labor less than large-cap ones on earnings calls, year over year, while they have more signs of pricing power, BofA said.

In a historical analog of 1965 to 1968, small-caps were the better performers, according to the equity strategy team.

And in stagflationary environment, small-caps have risen 3% on average annualized returns vs. no change for large-caps.

SA’s Quant Rating has a Strong Sell on IWM, due to momentum and risk.