Most equity investors were likely disappointed by the stock market’s performance last year. Although the Dow Jones Industrial Average finished the year up by more than 5 percent, the S&P 500 was essentially flat. And small-cap stocks declined by 5.7 percent, as measured by the Russell 2000 Index.

But those numbers don’t tell the whole story. Small-cap stocks were the top-performing equity category in the fourth quarter, gaining 11.9 percent and outperforming the Dow by almost 3 percent. Small caps were boosted by improving US economic data and indications that Europe had made tentative progress toward resolving the region’s sovereign-debt crisis. Strong earnings also contributed to small-cap stocks’ outperformance, as they produced more upside earnings surprises than large caps.

The relative strength in small-cap stocks is an excellent indicator that it’s time to add some risk to your portfolio by building positions in small-cap stocks as well as more cyclical sectors.

When the market rallies on the back of an improving macroeconomic situation, small caps typically lead the way. Because small-cap companies often have yet to establish strong overseas sales, a strengthening domestic economy and improving domestic consumption are key to their advance.

More cyclical sectors, such as industrials, technology and energy, also benefit in such an environment.

The technology sector will profit from recovering consumer and enterprise spending. The sector should also catch a tailwind from emerging markets’ emphasis on enhanced productivity.

Industrials are usually top performers in a mid-stage economic recovery. At this point, most of the higher-quality industrial names are realizing the full benefit of prior cost-cutting measures in the form of improved margins and cash flow. I expect solid earnings from the sector this quarter.

Finally, the energy sector will continue to enjoy growing demand. According to data from the International Energy Agency, energy supply and demand will be almost perfectly balanced this year, which will support higher prices for resources. This favorable outlook doesn’t even factor in possible geopolitical concerns, such as escalating tensions between the US and Iran. While a glut of supply will likely depress natural gas prices, there should be a marked improvement in oil prices due to tight supply.

Although potential headwinds remain, a number of positive trends should coalesce to make 2012 a “risk-on” year.