As readers of this blog post are well aware, I have been bemoaning the tribulations of small cap stocks for the past few years. Performance of this major asset class that we use a diversifier has lagged and been mostly dismal against its large cap brethren recently. For example, the large cap S&P 500 (IVV) is up an annualized +10.4% return over the past 3 years while small cap (SCHA) is flat at 0.0%!
So, it is with great joy that I report that small cap stocks had a great week (see picture below)! Last week, small caps made a big leap forward with a robust +5.2% return versus a +0.9% return for the S&P 500. Likewise, mid cap stocks popped, too, with a +3.7% weekly return.
We have seen this before, of course, when I last trumpeted some hope for small caps back in the fourth quarter of 2023. At that time, both small and mid cap stocks led the S&P 500 for that brief period of time. That rally was short lived, however, as its momentum lagged into this year; until last week! Before its rally last week, small cap continued to struggle with a YTD return of 0.0% against +17.5% for the S&P 500; that is not a typo!
In addition to significant allocations to large cap stocks, D&A has consistently held moderate allocations to small and mid cap stocks for most client accounts as a means to diversify risk away from increasing client exposure to the mega cap tech behemoths like Microsoft, Apple, Nvidia, etc. This strategy has caused a drag on performance for those accounts, but the idea, of course, is to hold complementary asset classes that “zig” when the others “zag”. We have certainly seen that recently, but so far mainly in one direction!
So, the question is why now? What is the impetus for this shift and the feeling of a “broadening” of performance into the small cap space? Some market commentators say it is the growing prospect of a Fed rate cut in September. Others say it is merely a rotation into small caps after mega cap tech stocks have moved too far and too fast leading to rotational profit-taking. Regardless of the cause, D&A will “stay the course” keeping client accounts broadly diversified in order to smooth the risk profile and performance over the long term.