Still Waiting for Large-Cap Leadership
What's stopping big from being the best?
Large-cap stocks traditionally lag higher-beta, lower-quality stocks in the first year of a recovery. And that was certainly true in the most recent case after the markets hit their March 2003 postbubble lows. From March 2003 to March 2004, the Russell 2000 small-cap index outperformed the S&P 500 by 29%.
In the second year of a recovery, however, investors have customarily rotated into large-cap funds, but so far that pattern has not held true. Analysts are saying the widely expected shift from small-caps has not occurred because a confluence of events is making this a less-than-typical economic cycle.
"A number of concerns have delayed large-cap funds from taking the lead, including geopolitical risks, interest rate concerns and the election," says Rosanne Pane, mutual fund strategist at S&P.That's not to say analysts don't think the rotation will happen. They just think investors considering large-caps might want to -- as they say in the military -- hurry up and wait.
This Time It's DifferentBy historical standards, the stage could not be more perfectly set for the transition. In 1993, the small-cap Russell 2000 index topped the S&P 500 by 7%, its third consecutive year of outperformance. To keep inflation in check, the Fed spent the following year raising the overnight lending rate from 3.35% to 5.5% in a series of six rate hikes. In response, investors shifted out of high-beta stocks in 1994 as the S&P 500 beat the Russell 2000 index by 4.5%. Fast forward to 2003, where the Russell was enjoying its fifth year in the lead, this time trouncing the S&P by 18.6%. And once again, the market is not anticipating a single rate hike by the Fed in 2004, but rather a long, drawn-out series of tightening moves set to span the entire year.
|Super Size Me
Large-cap vs. small-cap returns
|Fund Categories||1 Month Return%||Year-To-Date%||3 Month Return%||1 Year Return%|
|Source: Morningstar (returns through 6/21/04)|
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