Some recent academic research has called into question the existence of the “size premium,” i.e., the tendency for small cap stocks to outperform large cap stocks. Leading up to 2020, U.S. large caps had outperformed U.S. small caps for five of the previous six years, which would superficially seem to support this point. In addition, since the start of the pandemic, much has been made about winners winning, big getting bigger and little guys bearing the brunt of the punishment. While there is a lot of truth to these statements, smaller publicly traded firms (which aren’t small relative to the average U.S. business) had largely kept pace with the big boys through the summer months of 2020. Since the November elections, however, when the reflation trade began in earnest, small caps have outperformed large caps by more than 20% (Figure 1). The risk-on appetite from investors and the rotation towards cyclical stocks has been a boon for these smaller stocks.
It remains to be seen if the next round of studies will draw different conclusions about the small cap premium with this new data, but when it comes to U.S. equities performance since the March 23 bottom, small has been better than large.
Source: Morningstar, Voya Investment Management, as of 1/25/21
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