Large Caps Outperform While Small Caps Stumble

The Wall Street Journal featured our research in today's paper, highlighting the shift from small cap leadership into large cap. Click here for a link to the full article. Below are more details on the analysis.

The chart below shows the Russell 3000 performance across ten groups. Group 1 contains the smallest stocks by market capitalization, while group 10 contains the largest stocks. As shown, the smallest stocks gained an average of 359.55% between 3/9/09 and 8/31/09, more than double the next-best group. The largest stocks were the worst performers during that period, gaining an average of 58.73%.

click to enlarge

If we now look at the period between 8/31/09 and 11/10/09 exactly the opposite trend has occurred. The largest stocks in the Russell 3000 performed the best, gaining an average of 7.48%, while the smallest stocks performed the worst, losing an average of 1.50%.

While we can't necessarily call this a "shift to quality" (since we're not really sure how you define "quality"), it does highlight risk aversion in the market as blue chips outperform more volatile small caps.

The same trend holds true for index returns. Between 3/9 and 8/31 the Russell 2000 was the best performer, up 66.66% vs a 45.05% gain for the DJIA. Between 8/31 and 11/10 the DJIA performed best, gaining 8.67% compared to the Russell 2000's gain of 3.77%.

Comments

[MattZN:]

This is just due to the falling dollar. Large caps have far more international exposure then small caps so the falling dollar is giving them a much larger boost than other stocks.

-Matt

Nov 12 11:41 AM

[socrateaz:]

My take is rational. Small Caps tend to fall more in a down market for various reasons I will not expound on now. When people start to see value in a down market, they often see the best value in those stocks that fell the most but had good fundamentals. So small caps indicate a bottom has been reached as people either buy them or refuse to sell more of them. As people move more toward large caps, you approach a market top because people no longer find value in the small caps and move toward what they consider safety of large caps! That pattern has repeated itself many times over the years. If the pattern is true we are approaching or maybe have already reached a market top. I guess the future will come

Nov 12 12:07 PM

[bartpr:]

i am of the opinion that a market top is approached when the yield curve is inverted,ie. short greater than long . now the 10 yr exceeds the 2 by the widest margin in years. when the diff approachs zero. then watch. this is the past history of market tops. the small caps have been in correction for months. when the big caps correct i believe a bull will revive.

Nov 13 08:27 PM

[unfaire:]

After the market crash of last year, the government rescue effort was concentrated in large cap companies. They let the small companies fall by the wayside. This is very clear from what happened to the banks. The large banks, even those which almost went belly up, got a large infusion of capital while the small banks were left to swim by its own. Before the crash, the conventional wisdom in the street was that the smaller companies have a greater possibility of leaping up their profits. But, now the conventional wisdom is that the smaller companies are more likely to fail under the present situation.

Nov 16 11:46 PM

[FB5000:]

Yield curve is not currently inverted. It is steep. Signals growth and/or inflation.

Inverted is associated with top but short term rates would need to be greater than 3.5%. Clearly that is not the case right now.


On Nov 13 08:27 PM bartpr wrote:

> i am of the opinion that a market top is approached when the yield
> curve is inverted,ie. short greater than long . now the 10 yr exceeds
> the 2 by the widest margin in years. when the diff approachs zero.
> then watch. this is the past history of market tops. the small caps
> have been in correction for months. when the big caps correct i believe
> a bull will revive.

Nov 17 12:24 AM

[FB5000:]

Maybe.

There is also mean reversion at work.

Asset classes return in relation to their risk.

Smalls are riskier than Large so you expect to be paid for that.

2001 to 2008 Small Caps are up about 6%/year while Large Caps are flat.

1972 to 2008 Large Caps are up about 13%/year while Small Caps are about 14%/year.

Both are due to rise relative to their long run returns but Large Caps have some catch up so you expect them to do that. The longer they lag the greater the rebound will be. It's like trying to force a ball underwater - sooner or later it has to come up and revert to its normal position - whatever that is. Point is. Large caps wil return lower than Smalls but the gap these last few years has been too wide. Nothing goes down forever or stays up forever. Stuff evens out over long periods.

Nov 17 12:32 AM