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Smallcap may underperform in the recovery

Conventional wisdom, as one of my B-School classmates put it " You always overweight smallcap coming out of a recession".  There is some academic work that supports this contention. 

But from a causal standpoint, the reasoning goes that small company market caps are really beaten up in a recession as the real risk of bankruptcy, sales drops affect market valuations.  As the recession recedes and these risks dissipates, these battle tested companies are in great shape to grow rapidly and they are more nimble, watching the recovery and moving faster to take advantage.

This time there maybe a few more headwinds that may not disappear as the economy recovers including

- Financing: FDIC reported that SBA loans to small businesses fell 1.9% in the past year.  The local banks and regional players are digesting major losses in their commercial loans (malls, offices) and are shrinking credit to compensate.  Some players have disappeared or will (NYSE:CIT).  In credit risk wary world financing is going to be difficult for inventory, people, equipment

- Consumers:  The tapped out consumer is not likely to open that wallet till they repair their balance sheets, become more confident of the recovery, find a job.  The small businesses that serve them will find it difficult to drum up the sales need to grow and thrive.  The manufacturing led recovery will likely not lend itself to small business except some MRO, Equipment repair businesses.

- Demographics:  The entrepreunerial generation that sparked the TECH, Biotech and yes "Finance" booms and bubbles are getting old and thinking about retirement.  This will reduce the vitality and preponderance of "New Businesses" willing to redefine the world that we live in.

Disclosure: Long VIEIX TRMCX ARTMX PSVIX PRSVX IWC