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Smart Money Thinks Big

In the past five years, the simple formula for investing success has been to buy small-cap and value stocks. As of Nov. 30, the Russell 2000 was up 41% in the past five years vs. a 1% gain for the Dow Jones Industrial Average and losses of 9% and 23% for the S&P 500 and Nasdaq Composite, respectively. In the same period, the Wilshire Large Cap Value Index has risen 15% while its growth counterpart has fallen 11%.

The same pattern is evident in the two-year timeframe as well. But the outperformance of small-caps has shrunk in the past year while growth has started to outpace value.

To be sure, the past five years has been littered with false promises of a big-cap comeback. But it's notable that many of the smarter "gurus" predict the best way to make money going forward will be in big-cap and growth stocks.

"Our models continue to indicate that growth stocks are a better value than value stocks, and large-caps will continue to outperform small-caps," Ed Keon of Prudential Securities commented earlier this week.

Citigroup's chief U.S. equity strategist, Tobias Levkovich, who made a well-timed bullish call at the October lows, agrees: "Some of our work lately [is] favoring the mega-cap stocks; in this context, it does appear likely to us that growth stocks should start to come into their own as money flows may begin to switch out of value and into growth."

Elsewhere, Bernstein strategist Vadim Zlotnikov struck a similar theme in his weekly commentary, suggesting small- and mid-cap stocks will struggle to match the Street's lofty expectations.

"At this point, valuations for mega-cap stocks remain highly attractive on most metrics and growth expectations seem more reasonable and achievable," Zlotnikov wrote. "By contrast, projected earnings growth for the small- and mid-cap stocks may be increasingly difficult to achieve as it will require significant margin expansion from already peak levels amid a decelerating sales growth environment."

Shifting Tides
Big-cap and growth stocks are coming back into favor after long-term dominance by small-cap and value
Index 5-year 2-year 1-year YTD
DJIA 1% 9% 4% 0.20%
SPX -9 17 6 3.1
Nasdaq -23 13 6 2.6
Wilshire Value 15 20 5 8
Wilshire Growth -11 19 13 9
Source: Baseline
* performance through Nov. 30
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Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

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