The tremendous returns that small-cap stocks have delivered in the past five years, particularly since 2003, may finally be at an end, The Wall Street Journal reports.
Now that stock markets around the world have tumbled and fears of further interest rate increases take hold around the world, some of the worst damage can be traced to small- and mid-company shares.
Certainly, small-cap stocks tend to rise at a rapid clip when the economy revives from a bear market. But when the economy begins to turn a corner back downward, they also fall at a fast pace.
"When the economic and credit cycle is going their way, people want to buy small and midcaps because they promise more growth," said Philip Isherwood, global equity sector strategist at Dresdner Kleinwort Wasserstein. "What you've seen over the last month is a shift" to large-cap stocks.
The reason large-caps do better in an environment of tighter money is because they tend to have stronger balance sheets, better credit ratings and, therefore, greater access to capital markets than small-caps. With the markets becoming so volatile, investors are also looking for securities in which they can move in and out of easily, which is possible with large-caps because of the higher volume at which they are traded. Finally, because of small-caps' stellar returns in recent years, their valuations have become rather pricey.
Since the beginning of 2003, the Russell 2000 index has risen 100%, the European Dow Jones Small-Cap index has grown 113% and the European Dow Jones Mid-Cap index has increased 125%. By comparison, large-cap stocks have risen only 43% and the Dow Jones Industrial Average has seen a 64% increase in value.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.