Wednesday, September 10, 2008
Here's an interesting chart inspired by one of my mentors, the late Jude Wanniski. He argued that small cap stocks tended to do well when the economy was in a period of slow growth (which usually coincides with the Fed being relatively easy), while large cap stocks did better during periods of strong growth (when the Fed is typically tight). Fed easing in 1991, 2001, and recently definitely marked the beginnings of a strong move in small cap stocks. What we're all waiting for now is when the Fed will once again embark on a tightening campaign. Right now the bond market doesn't expect that to happen until sometime around the middle of next year, but if I'm right and the economy is in better shape than most believe, then the Fed could raise rates well before that time. That would be a shock for the bond market, and it might make people concerned about the economy, but it would probably also mark the beginning of a period of strong outperformance for large cap stocks. I'd recommend building up your exposure to large cap stocks starting now. As the chart shows, they've rarely been so undervalued relative to small cap stocks (i.e., it's a good time to start switching from small caps to large caps).
Posted by Scott Grannis at 2:02 PM