Small Caps

The investment leadership of a given year has historically had better-than-even odds of outperforming in the following year at both the asset class and equity sector levels.

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Gains will likely be modest, and secondary stocks could finish the year flat-to-down. The year will likely be marred by a moderate to severe mid-year correction, and Small Caps could easily suffer a 20% hit during that swoon.

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Small Caps are selling at a 20% valuation premium relative to Large Caps, using non-normalized trailing operating earnings.

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Momentum and Value worked in 2013. Materials and Financials were the easiest sectors to exploit; Discretionary and Tech the most difficult. Momentum works in December; Value and Small Caps at the start of the year.

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Small Caps are selling at a 16% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. Using estimated operating earnings, Small Caps are selling at a higher valuation premium of 23% (25% last month).

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The Russell 2000 is about five points ahead of Large Caps YTD, and is approaching its April 2011 long-term relative peak. We view this outperformance as their leadership’s last gasp and not a new cycle.

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Large Caps lost 2.9% (total return) in August, just ahead of Small Caps (-3.2%) and Mid Caps (-3.8%). YTD, Small Caps continue to perform ahead of the other two subsets.

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Small Caps are selling at a 15% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. This is the same as the past two months’ readings. Using estimated 2013 operating earnings, Small Caps are selling at a higher valuation premium of 23% (24% last month).

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Large Caps gained 5.1% (total return) in July, lagging Small Caps (+7.0%) and Mid Caps (+6.2%). YTD, Small Caps are now ahead of the other two subsets, and Large Caps are the laggards.

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Small Caps are selling at a 15% valuation premium relative to Large Caps, using non-normalized trailing operating earnings. This is the same as last month’s reading. Using estimated 2013 operating earnings, Small Caps are selling at a higher valuation premium of 24% (25% last month).

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In this note, we discuss our market-level measure of quality, and highlight an expanded methodology for determining the “quality” of a stock and the performance implications associated with such a concept.

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Leuthold’s Doug Ramsey takes an in depth look at historical Small and Large Cap cycles and offers insight as to where we stand now and what can be expected going forward.

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From the stock market to politics to football, Doug Ramsey offers up ten predictions and thoughts for the New Year…. Even though we’ve already had a one month “peek” at 2012.

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Current record high corporate Profit Margins examined in this month’s “Of Special Interest.” Topics include the sustainability of the trend, commodities as profit trackers, margins as a potential forecasting tool and discussion on profits by sector and market cap. 

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This month’s “Of Special Interest” takes a stab at debunking the “Sell In May And Go Away” anomaly. Instead, we have come to respect this annual strategy.

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The current period of small cap leadership is the longest ever. And while small caps have been selling at a premium, the premium has persisted for a long time.

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Despite our still (cautiously) bullish outlook, historical P/E levels which once provided support to the stock market are expected to now offer resistance as the market moves higher.

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A look at stock performance in various inflation environments would seem to predict below average performance in 2009, but threat of monetary debasement inflation in 2011 and beyond could set the stage for poor performance.

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Don’t think we’ve seen a cyclical top, because that would mean everything essentially topped at the same time. Breadth has yet to peak in this cycle and that is one reason we expect the market to move higher over the near term.

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