Since 1947, there have been 11 completed bull markets, and investors are currently enjoying the twelfth.
Small-caps tend to outperform the S&P 500 during the first four years of a bull market.
“Year five – the one we are in now … typically saw large caps post higher total returns than small caps, and outpace small caps 80% of the time. This year’s results could change things, however, as the S&P 500 rose 18.4% in price through September 13, while the S&P SmallCap 600 gained 24.9%,” the strategist wrote.
“Should this bull market continue into its sixth year (March 9, 2014-March 9, 2015), then history says, but does not guarantee, that small-caps could see a late-stage surge and outpace large caps once again. Since WWII, only three bull markets completed year six, and small-cap stocks outpaced large ones in two of these three observations,” Stovall added. “As a result, based on full-year bull market performances, small-cap underperformance cannot be used an early-warning signal against an eventual topping of bull markets, in my opinion.”
Based on the duration and magnitude of advance for this small-caps, history would imply that we are probably in the latter innings of small-cap dominance, and it will likely become time for the momentum to shift back into the large cap’s favor, according to S&P.
“Since 1947, the average total return for small-cap stocks has usually exceeded that of large-cap stocks in five of six bull market years,” Stovall concluded. “Only in year five did they traditionally underperform, rising an average 18% to the S&P 500’s 24% gain. So to think that small-cap performances will serve as a canary in a coal mine, signaling with ample foreboding of an impending bear market, is unfounded by my analysis.”
Full disclosure: Tom Lydon’s clients own IWM.
