Tuesday, June 2, 2009

Large cap stocks are set to outperform (3)

Here's an update to a chart I last posted in January. It's a story that is waiting to play out: given that the next Fed move will most likely be a tightening, this chart suggests that large cap stocks should outperform small cap stocks going forward. Large caps are currently almost as weak as they have been relative to small caps for quite some time.

When money gets easy, small cap stocks tend to outperform because easy money typically follows in the wake of big economic slowdowns, and smaller companies are more nimble and better able to profit from improving economic conditions. Large cap companies tend to do better when monetary policy starts to tighten, since tighter policy is one way the Fed tries to slow the economy down and/or reduce inflation pressures. Large companies have a franchise which helps them survive in tougher economic times.

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