The Case for Small- & Mid-Cap Stocks in a Recovery

Thoughtware Alert Oct 08, 2020
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The pandemic has been difficult for many businesses, but especially the country’s smaller firms. When looking at publicly traded companies, large companies (large-cap), proxied by the S&P 500, have outperformed small- and medium-sized firms (small- and mid-cap, or SMID). Using the S&P 1000 to proxy SMID stocks, large-cap stocks have outperformed SMID stocks year-to-date by 16.16 percent as of September 30, 2020. Figure 1 shows the historical relative performance of large-cap and SMID stocks. As you can see, SMID stocks haven’t been this “cheap” to large-cap since the tech bubble in the early 2000s. While each recession and bear market has its own unique circumstance, the outperformance of large-cap over SMID stocks is common. Large firms are “safer,” usually with stronger financial positions and better access to capital. 

SMID/Large Cap Graph
Figure 1 Relative Performance of S&P 1000 and S&P 500, as of 09/30/20; Source: Morningstar

 

What also is common is the outperformance of SMID during the eventual economic recovery. Table 1 below shows the one-year, two-year, and three-year performance of large and SMID companies after the past two recessions and bear markets:  

Bear Market Table
Table 1 Annualized returns post-bear market; Source: Morningstar

 

The COVID-19-caused recession and market activity have been anything but “normal”; however, we believe we are now in an economic recovery. The relative attractive pricing of SMID to large-cap stocks combined with the historical track record of SMID outperformance in recoveries recently led BKD Wealth Advisors’ Investment Committee to recommend overweighting SMID stocks in our clients’ portfolios. Our portfolio managers are actively working to implement these changes, considering each client’s unique situation and portfolio. 

Please reach out to your BKD Trusted Advisor™ or submit the Contact Us form below for more information.
 

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