Small is Beautiful

Is it a small world after all?

Small stocks have been on a tear. While the S&P 500 was up 15% last year, the Small Cap index was up 20%. Small tech companies were up 37%, while large tech companies were up only 11%. It’s the same overseas: small European companies were up 17%, while large Euro companies were up 6%. Why?

Part of the reason has to do with finance. Small companies depend more on loans than large companies. When the banks had to cut back, loans to smaller companies suffered. As the world pulled back from the brink, a lot of small companies got their loans and their mojo back. As financing became available, they could grow again. So it makes sense for small companies to outperform big companies after a financial crisis.

Will this continue going forward? It’s unclear. One element that does favor small companies is the job market. With unemployment so high, it’s easier to find good people to fill needed slots. In the global war for talent, it’s not necessary to have a big-budget recruiting effort to attract qualified candidates. That’s one hidden blessing of higher unemployment.

Employment is one reason why small stocks may outperform large stocks in 2011. But hold onto your hat—it’s likely to be a bumpy ride.

Douglas R. Tengdin, CFA
Chief Investment Officer
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