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TheStreet Open House

Large Caps to Beat Small Caps: NY Fed

NEW YORK ( TheStreet Ratings) -- Adjusting the asset allocation weightings in your portfolio between large cap and small cap companies can create big differences in long run results. Any clues helpful in deciding whether large cap stocks may outperform small cap stocks in this economic cycle should not be ignored.

In the latest edition of "Current Issues in Economics and Finance" by Aysegül Sahin, Sagiri Kitao, Anna Cororaton, and Sergiu Laiu of the Federal Reserve Bank of New York explain why small businesses were hit the hardest by the recent recession. While unstated, the research presented implies that large businesses may be better positioned to ride out the doldrums and gain in an economic recovery.

The research found that from December 2007 to December 2009, firms with 50 or less employees shed 10.4% of their employees while companies with more than 50 employees only reduced headcount by 7.5%. This is a reversal of the 2001 recession where large companies laid off more workers than small companies. This time 40% of the overall employment decline was from small businesses compared to just 10% in 2001.

The National Federation of Independent Business ongoing survey of the single most important problem associated with weak economic conditions as reported by small businesses showed that the overwhelming concern was poor sales and the lack of consumer demand for their products. Factors such as insurance costs, labor availability, interest rates, financial conditions, and competition from large businesses continue to diminish.

The research pointed to small businesses lagging large businesses in inventory and sales growth. In what may be the most important factor divergence, while large businesses have been increasing their fixed investments small firm fixed investment continued to plunge into 2010.

Without customers there was no call to borrow to build capacity. This could lead to larger companies having a competitive advantage over smaller companies.

Another reason to avoid over focusing on publically traded small businesses was pointed out in a 2010 study by Haltiwanger, Jarmin, and Miranda. Their research pops the commonly quoted misconception that existing small companies would lead the recovery as job creators when the driving force behind job creation is mostly attributable to business start-ups and young businesses that happen to start off small.

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