Small Cap median valuations are among the highest in our 40-year database, but they are bottom quintile versus the nose-bleed level of the median Large Cap. If this Small Cap leadership cycle only matches the shortest one on record, it will last another three years. Based on the valuation gap, that guess seems conservative.
Three months ago, Large Cap Growth and Momentum were the winning ways to play the market; the long-time resiliency of these entrenched leaders was a cornerstone of the bullish case. Suddenly it’s Value and Deep Cyclicals leading, anything possessing Momentum, of late, has turned toxic. Ironically, this “new” leadership is now the foundation for the bullish reasoning.
Value is the philosophical cornerstone of many legendary portfolio managers and is widely recognized as one of the most robust quantitative investment factors. Yet, despite its compelling conceptual merits and long-term record of superior returns, recent years’ underperformance of Value has lasted long enough to weigh on even 10-year performance records.
New bull markets are front end loaded, with the strongest performance usually coming within the first few months. Study also shows that Small Cap Growth stocks tend to outperform their Large Cap and Value counterparts.