During most of the '90s, big-cap stocks ruled the market and small-cap stocks took a back seat.

But starting in 1999, small-cap stocks have been outperforming their large-cap brethren on a regular basis. From March 1999 to now, the

Russell 2000 is up 25%, while the

S&P 500

is up just 1% over the same period. Year to date, the Russell is up 1.3% while the S&P 500 is down 5.4%.

Small is Beautiful
The small-cap Russell 2000 (RUT) has significantly outperformed the S&P 500 (SPX) since the beginning of the year.

With the


having cut rates five times this year (most recently Tuesday's 50 basis-point cut), it may not be that surprising that small-cap stocks have done well in 2001. But

John Bollinger

, president of


, says the turnaround in small-caps has been going on for the last nine quarters, during which time the Fed has both eased



What's more, Bollinger says that in addition to the possibility of further rate cuts, small-cap names make sense for other reasons, too. "The real reason to go to the small-caps is that the big-cap story has already been told," Bollinger says. "But the small-cap story has yet to be told. There are lots of small stocks that will do well. They are very capable of substantial growth rates."

And if the Fed does continue to cut rates, Bollinger says that's just icing on the cake. "One would think that periods of easing would be salutary times for the small-caps. They are capable of much higher growth rates than S&P names."

And if the Fed doesn't cut rates any further this year (something that Bollinger isn't suggesting)? "This

small-cap rally started before the Fed increases and Fed easings, so there doesn't seem to be any reason why the Fed's action should have any real impact on them," says Bollinger.

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