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Leon's avatar
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How do Small Caps vs. Large Caps perform during a recession?
I just read 2 interesting studies regarding this topic and i want to share the most interesting parts. The study from L.N. Switzer (2010) is about Canada and US, but i will focus on the US:

I think most of you know, that small caps oupterformed large caps over time. In the 84-year holding period from 1926-2010 the difference amounted to over 2.03% per year.

The table below shows how small caps vs. large caps performed during different economic cycles.

Only between 1983 and 2000 the large caps performed better than the small caps.

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But how exactly does the small-cap premium behave over the business cycle?

In the year prior to the peak (the year preceding the onset of the recession) small caps often lagged and large caps performed better as we can see in the table below. Especially in all the recessions since 1990.

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But in the recovery period (12 months period subsequent to an economic trough) small caps provide substantially higher returns than large caps during this time frame.

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But 12 months is quite a short time, so let‘s have a look at what Erik Norland found out for CME where he compared the Russel 2000 & S&P 500.

He found out, that small caps often outperformed during periods of economic distress.
  • 1979-82: high inflation, swings in interest rates & double-dip recession Small cap outperformed by 76%
  • 90-93: recession & slow recovery; +48%
  • 99-2013: Dot-com, 9/11, two wars, global financial crisis; +114% outperformance but with periodic interruptions

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In contrast large caps often outperformed small caps during periods of economic expansion:

  • 83-90: during 80s boom S&P outperformed by 91%
  • 94-99: 90s expansion; +92%
  • 2013-2020: +29 % until end of 2019 and then additional 20% during the first three months of 2020

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We are not yet in a recession, but it looks like we are going into a period of economic stress.

Will small caps again outperform large caps during this time?

I don‘t know. History never repeats itself, but it rhymes. If you‘re interested to dig deeper i‘ll link the studies below:


Erik Norland
t.co
Why Large-Cap Stocks Have Outperformed Small Caps - CME Group
Small-cap stocks lagged the performance of large caps in the first four months of 2020 despite a track record of doing well at times of economic distress.

Leon's avatar
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