Despite the recent volatility, all the major indexes remain up about 20% or more for 2021, which means if you didn’t make money this year, you were either all in cash or very unfortunate. That may be ready to change in 2022. While there are a variety of reasons, investors need to start thinking now about their plan of action. There is still plenty of time to rearrange portfolios, do some tax-loss selling and make other changes. The route to take in 2022, according to one top Wall Street pundit, may be surprising.

Jill Carey Hall, the superb equity and quantitative strategist at BofA Securities, makes the case that the S&P 500 will end 2022 at the 4,600 level, which is only about 2% higher than current levels. Hall compares the current situation to how the market traded in 2000. If that’s indeed the case, then it may be time to look at small-capitalization stocks. She noted this in a recent research report:

Despite our forecast for a flat year for the S&P 500, we are still bullish on pockets of the market, including small caps. Small caps are more domestic, more exposed to the services spending recovery, bigger beneficiaries of capex/reshoring and are inexpensive versus large caps. But COVID is the key risk: small vs. large cap returns have been highly correlated with cases. While we assume improvement – and so far our biopharma group doesn’t expect a major impact from Omicron on the pandemic’s trajectory – any significant resurgence could suggest more caution.

Hall lists five specific reasons small caps make sense for 2022:

1) More pricing power (more mentions on earnings calls vs. large caps, and margins less negatively correlated with labor costs and CPI than large caps)

2) Commodity inflation benefits small caps (and capex)

3) Small caps led during several historical analog periods (late 60s, late 70s/early 80s)

4) Hedge against stagflation (small beat large)

5) Small caps better discount inflation (pricing in 4% CPI; large caps pricing in 1% CPI).

A major point from the report is for investors to stick with quality companies. The buy-the-dip risk-on crowd probably has taken a beating lately and won’t be the volume and breadth support they have been over the past two years.

We screened our 24/7 Wall St. small-cap coverage universe looking for Buy-rated companies that pay solid and reliable dividends. We found five that look like great ideas for investors wary of a year 2000-like repeat. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.