NEW YORK ( TheStreet) -- Large-cap stocks may begin to outperform small-cap stocks as investor anxiety increases in coming months.
The indicator discussed in this article compares the strength of iShares Russell 1000 (IWB) over iShares Russell 2000 (IWM). Large-cap stocks tend to lead smaller-cap stocks when investors are anxious about economic conditions. The situation doesn't automatically mean equity indexes will decline, just that investor caution has pushed money into defensive sectors.
When small-cap stocks lead, it implies that investors are confident in the overall economy. They are more willing to take risks in riskier equity sectors, believing that strong financial markets will help companies both large and small.
Throughout 2013, equity indexes rallied at an exponential pace. Small-cap stocks showed relative strength the entire year, steadily climbing higher every quarter. Equity investors had little fear, knowing the Federal Reserve had a safety net below the market, deterring sellers from getting too bearish.
Things have changed, however, in 2014. The Fed has cut its monthly bond purchases by $20 billion over two consecutive meetings. Investors are no longer hopeful that central bank help will be there if things go wrong in the economy.
U.S. economic numbers have been mixed, as higher growth has come alongside a slow growing labor market. Investors are looking for a faster recovery if the Fed intends to remove stimulus completely by the end of the year.