Bryn Mawr's Jeff Mills believes the small-caps boom is only just beginning and 2021 will deliver even bigger gains

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Bryn Mawr's Jeff Mills believes the small-caps boom is only just beginning and 2021 will deliver even bigger gains
General view of atmosphere during the NYSE opening bell ceremony at the New York Stock Exchange on December 15Getty Images
  • Small-cap stocks look set to deliver even bigger returns to investors in 2021, thanks to economic recovery at the hands of stimulus and vaccines, Bryn Mawr's Mills said.
  • "From a relative value perspective, you're going to do well in small caps and I think the setup is just good for 2021," Mills told CNBC's 'Trading Nation'.

Small-cap stocks are set to deliver even bigger returns to investors in 2021, as a vaccine and a raft of stimulus help repair the damage to the economy from the coronavirus pandemic, Bryn Mawr chief investment officer Jeff Mills said on Wednesday.

Mills, whose company has $2.4 billion in equity assets under management, according to Bloomberg data, told CNBC's Trading Nation the outperformance of small-cap stocks in 2020's record-breaking equities rally would likely continue next year.

"For the first time in a long time, we're at this point where monetary policy and fundamental economic growth, at least in our opinion, line up, and then on top of that, you have the fiscal stimulus," he said.

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The Russell 2000 index of small companies - those with a market capitalization of less than $30 million - has surged by nearly 19% so far this year, eclipsing the 14% gain in the S&P 500 large-cap index, which has benefitted from double-digit percentage gains in some of its most valuable components, particularly those whose products have been in high demand in the "work-from-home" economy, such as Apple, Amazon, streaming service Netflix, or video conferencing platform Zoom.

This outperformance is not unusual. Small caps, because they are less owned, tend to be more volatile than larger companies and, as such, often fall more than the broader market in a downswing and gain more when values recover.

Read more: Google's founders visited Warren Buffett more than a decade ago - and were so inspired they modeled Alphabet on Berkshire Hathaway

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Trillions of dollars in fiscal stimulus, together with the most recent agreement among lawmakers to disburse another $900 billion in aid, and record-low borrowing rates have helped foster a record-breaking rally on Wall Street.

"It clears the path for the market to believe that okay, maybe over the next quarter, we're going to have some trouble from an economic data perspective, as we work through this next phase of the virus. But as we move forward throughout the totality of 2021, I think the outlook actually looks pretty good," Mills said.

The rollout of vaccines against COVID-19 across the United States, which has the highest death toll in the world and the worst infection rate, with over 300,000 dead, has helped shore up investor confidence in a swift recovery next year, once enough people are protected against the virus.

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Typically small- and mid-cap companies tend to be more closely linked to the health of the underlying economy, given that they are usually more likely to have a domestic, rather than international focus.

The roughly 30 million small and medium-sized companies in the US account for nearly two-thirds of net new private sector jobs in recent decades, according to official US data.

Since the depths of the market crisis in March, the Russell 2000 has doubled in value, compared with a 66% increase in the value of the S&P 500. And this may be just the beginning, according to Mills.

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"Those stocks are now breaking out of a two-and-a-half-year bear market. So I think from a relative value perspective, you're going to do well in small caps and I think the setup is just good for 2021," he said.

Read more: We spoke to the top 5 European fund managers of 2020 to uncover their tips and tools for delivering stellar returns - and their star stock-picks for 2021

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