What Will Make Small Cap Stocks Great Again?

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The times, they are a changing. The advent of high-frequency traders, algorithms and index-mania have caused many long-regarded investment tenets to be challenged. One of those is the small cap value out-performance idea.

Have you ever spent time with a financial advisor whose investment approach is rooted in “asset allocation?” Most are, these days. I am not one of them, at least not in the traditional sense. But if you have been informed by one, you were probably told about some academic studies that date back a few decades.

The chart above shows what has happened to small cap value stocks since shortly after the 2016 U.S. Presidential Election. The results have been pretty dreadful. The stock market’s attention is increasingly focused on a smaller number of very large companies. Thank index investing for that. You see, while there are thousands of indexes, the money floods into larger-caps. This tends to be at the expense of other asset classes, including international stocks and small cap stocks. Money flows matter a lot these days.

Financial stocks are the largest sector group within the small cap value world. Falling interest rates in 2019 likely impact these smaller banks and other financial companies, just as they do larger ones. Since the start of the graph above, the 10-year U.S. Treasury Bond yield has dropped from 3.2% to 1.7%.I regularly track the movement of 100 ETFs, which give me an ongoing story about what is happening with global markets. That’s a lot of asset classes to track, for sure.

 

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