It has been Wall Street cannon that small-cap stocks beat the large-cap stocks over time. While this has been true over the past 30 years, it is a bit more nuanced than that. And when it isn’t true, like right now, it is a sign of a looming equity apocalypse.
And by nuanced, I mean that small-cap stocks lead the market out of corrections but large-cap stocks lead the market in the last phase of bull markets.
Below is an historic chart of the Wilshire family of funds. It runs the gamut from microcaps to large caps and a few in between.
For example, from 1997 to 2000, during the dot-com bubble, the stocks with the highest market value, like Amazon, AOL, and Microsoft, had the biggest gains. These are represented by the black line in the chart below.
In 2003, when the market started to climb out of its funk, the pink line, which represents the smallest companies, or microcaps, started to move.
From 2009, after the Great Recession, the small companies again led the charge but were soon eclipsed by the blue line, which is mid-cap companies.
However, if you just look at the last year from August 2018, you find that the big companies are leading again.
Not only did they sell off the least, but they also made the most gains rising out of December's correction. The large caps returned less like a phoenix and more like a mafia Don who bought the jury and declares that the D.A. “don’t got nothin”...
What we are looking at is an example of the business cycle and creative destruction. Large caps get the most benefit from easy money and positive governments. They have economies of scale. They buy back shares and take on massive debt. They IPO vaporware, unicorns, and cash flow negative companies.
Right now I can walk outside and ride one of four different brands of scooter for a half an hour for under five bucks. I can then take a picture of that scooter, log off, and toss it into the harbor. Companies like Uber, Lime, and Bird will never make money.
But I’m okay with Wall Street subsidizing my transportation. If these guys are lucky, they will make their money before the party ends.
There are a number of similarities between today's market and the 1998–2000 market. There is a global slowdown while the U.S. remains bullish.
Interest rates are being cut after they were raised prematurely. Large-cap tech is leading the market higher. The good news is that there is a great deal of money to be made in the last two years of a bull market.
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