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Will Large Cap Outperformance Continue?

Small cap stocks have been underperforming large cap stocks all year. The long-term chart below shows the S&P 500 Index (SPX--5,375.32) going back to 1985 along with the ratio of the Russell 2000 Index (RUT--2,024.35) to the SPX. We have data on both indexes going back to 1979. The only time the RUT has been lower relative to the SPX was in the late 1990’s, in the runup to the dotcom crash and lasting into the early 2000s. That could be worrisome, but it first reached the current level in mid-1998 and the indexes had another 35%-40% to run before their all-time highs in early 2000.

iotw june1

The two times the ratio reached the low levels that we currently see were in late 1990 and mid-1998. The dates listed below are when the reading first fell below 0.386. We know stocks ultimately crashed in the early 2000’s and that they performed poorly immediately after the signal in 1998, but a one-year return of 18.9% for the SPX in the year after this reading is great. When the reading reached a low in 1990, the SPX went on to gain 25% over the next year and the RUT gained a whopping 50% over the next year.

iotw june2

Large Caps Outperform Year-to-Date 

The SPX is up 12% for the year while the RUT is barely breakeven. I looked at other years going back to 1979 when the S&P 500 outperformed the small cap index by 5% or more. There have only been five other occurrences, and those years are in the table below along with the subsequent S&P 500 returns. Each of these years, except for the odd year of 2020, the outperformance was due to a strong SPX rather than an especially weak RUT. Based on these numbers, it seems strong large cap performance, relative to small caps, is a bullish indicator for the market. The S&P 500 was positive every single time over the next six months, averaging a return of almost 12%. The one-year returns are strong as well with the index gaining an average of 26.5% with every return positive.

iotw june3

Finally, here are the RUT returns in these years in which the small cap index lagged the large caps. These returns are not as impressive as the big cap returns above but a 9.5% average return over six months with 80% of returns positive is still something any investor would be happy with.

iotw june4

Based on the data in these year-to-date tables through June 10, stocks can continue to outperform and there’s no need to expect regression on large caps compared to small caps. Historically, large caps, in these instances, have continued their outperformance versus small caps.

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