Large Caps vs. Small Caps

By Arthur Levin

This is the season for the annual onslaught of market prognostications as to why 2014 will provide a second helping of 2013’s entree, or perhaps a revised menu populated by new and different trends. Every market analyst, strategist and blogger worth their nameplate (or URL, as the case may be) will tend to offer some type of outlook as to how the next months will play out.

Furthermore, we will undoubtedly be queried from clients enamored by the sensible prose surrounding a market prediction for 2014. Having the “rest of the story” is always helpful, and that other side of the argument is best presented by the market itself … our job is simply to listen attentively.

A recent article from MarketWatch titled, “10 money-making investment ideas for 2014,” fairly well encompassed many of the popular themes that have been latched upon in recent weeks. We thought it worth the time to offer a bit of perspective regarding one of these themes that has garnered the attention of the market thus far.

“Stronger global growth is good news for large U.S. companies that count on overseas demand. Companies in the S&P 500, for example, average almost half of their sales from outside of the U.S. Shares of big-cap multinationals — especially those in the cyclical, technology, energy and industrial sectors — also could benefit from a pickup in U.S. growth and a willingness among consumers and corporations alike to loosen their purse strings.

On a valuation basis, analysts at Bank of America Merrill Lynch favor large stocks over small. Large multinationals also frequently provide dividend income and dividend growth that can satisfy yield-hungry investors.”

On technical basis, however, Small Cap stocks have been favored over Large Caps in 2013 and they remain favored over Large Cap heading into 2014. No matter how you slice it, dice it, or examine it, Small Caps were among the best performing areas in the market last year, and the strength and leadership among Small Cap stocks was not a new phenomenon, or even just a 2013 fad.

This is a trend that has been in place for years. When we compare the All US Large Cap fund group versus the All US Small Cap fund group, we find that Small Cap has been favored over Large Cap since early 2009. In fact, since early 2009, All US Small Cap has traded above the All US Large Cap group, and the margin in score continues to widen heading into 2014, favoring All US Small Cap on a relative strength and trend basis.

This article was written by Dorsey Wright and Associates and provided by Arthur Levin, Financial Advisor, Senior  Vice President — Investments, Wells Fargo Advisors, LLC, Beaufort, South Carolina, 843-524-1114. 

The prices of small company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Dividends are not guaranteed and are subject to change or elimination. Past performance is not a guarantee of future results. 

Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

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