Have Large Caps Made a Comeback?

In the second half of the 90s, large cap stocks were "all the rage." Since the 21st century began, however, "large caps" have turned in significantly lower returns than small company stocks.

One might argue that, due to the unprecedented run-up of the S&P 500 and Nasdaq 100 in the late 90s, larger companies pulled back more ferociously in the bear of 2000-2002. And in the economic recovery of 2003-2005, one might explain that small companies typically dominate in the early stages of new bull markets.

Yet, small company dominance extended itself into 2006. That has led many to wonder, "Are small caps still hot? Should I be overweight the small company ETFs or the large company ETFs?"

Year-to-date, the SPDR S&P 500 Index Fund (SPY) is outshining the iShares Russell 2000 Index Fund (IWM). And the evidence since the beginning of April appears quite compelling.

Granted, 5 1/2 months, let alone 6 short weeks, is hardly proof that a shift in leadership has taken place. That said, the investment markets do change. (Is it really so difficult to believe that larger companies may take back the throne? Aren't large caps supposed to lead the way in a slower economy?)

Before we dub the SPDR S&P 500 (SPY) victorious from here on out, it makes sense to take a look at the middle child; specifically, how are mid-sized companies in the S&P Mid Cap 600 Index Fund (MDY) faring in the fight?

Not too shabby, thank you very much! Mid-sized companies are clearly worthy of your allocation.

Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Michael Bom...:]

Gary, one of the questions I've asked myself as of late is whether any one interval is appropriate for this analysis. Is the market memory 10 years or 10 months or 10 days?

If you believe that the market has a shorter memory, I think today's market has shown that<b>small-cap... are the ones catching up now</b>, not the other way around. I've got charts and commentary on the correction up between IWM (Russell2000) and DIA/SPY here.

2007 May 21 04:49 PM