Look For Large Caps to Outperform (ETFs: JKD, JKE, JKF, PWB, PWV, VV)

 |  Includes: JKD, JKE, JKF, PWB, PWV, VV
by: J.D. Steinhilber

Our bias in the U.S. stock market continues to be towards larger-capitalization stocks. Even though small-cap stocks have more than held their own since we adopted this posture at the outset of 2005, leadership has shifted towards large-caps in the past three months, and we expect that trend to continue.

Moreover, should a broad-based market decline occur, the downside risk for small-cap stocks is much more significant than for large-cap stocks. Small-caps are currently selling at higher P/E ratios than large-caps. Normally, small-caps sell at a discount because of their higher risk characteristics. In the current cycle, small-cap earnings had been growing at a faster rate than large-cap earnings, providing some justification for premium valuations, but small-cap sales and earnings momentum has decelerated over the course of 2005 and is now in line with the growth rates seen by large-cap companies. Given that small-cap leadership dates back to 2000, this cycle of small-cap out-performance appears quite long in the tooth, so we are maintaining our preference for large-cap stocks.

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