Stock market today: S&P 500 falls as rising Treasury yields blunt tech
Does size matter? Since the Pandemic, and judged by the recent performance of the Magnificent Seven and mega-cap indexes, many investors would say it matters, likely claiming that the greater the size, the better the returns. Those with data going back decades, rather than years, would also agree that size matters.
However, their conclusion would be vastly different. Size matters a lot, but the smaller stocks, not the largest ones, are the better investments.
The graph below, courtesy of Tobias Carlisle, using Fama-French factor data, shows the performance of holding the top decile of stocks versus holding the average of the top three deciles. Tobias claims this is a comparison of the largest 178 stocks versus the largest 535 stocks.
There are two noteworthy points worth highlighting in his graph.
- The large stocks tend to outperform the largest stocks over time. However, as he circles, there are periods lasting 5-10 years during which the largest stocks perform better.
- Over the last ten years, the largest stocks have decently outperformed the large stocks. The outperformance has been approximately 25%. The only other two instances in the last 100 years where the largest stocks performed better were in the late 1920s (35%) and the late 1990s (36%).
The graph is very concerning. However, it’s worth appreciating that the counter-trend favoring the largest stocks may continue, and the trend may have more fuel in the tank. Like valuations in general, this graph likely portends poor relative returns for the largest stocks, but it’s not a good timing tool. We end with a quote from Tobias:
But the long-term trend is for small (535) to outperform large (178) by about 0.8% CAGR. At some point, the series returns to trend. Small and value will outperform.
The Week Ahead
We will be very interested this week to hear what the other members of the FOMC have to say about monetary policy. On Friday, Beth Hammack, the most hawkish member, will speak. There was one member who projected that the Fed would hike rates. Is it Beth, and if so, what is her rationale?
We are also curious to see if any members were undecided and considered cutting by 50 basis points. Chairman Powell will speak on Tuesday. We suspect he will reiterate similar themes as he did in his post-FOMC meeting press conference.
PCE prices will be released on Friday. PCE is typically easier to forecast than CPI or PPI, as much of the data used to calculate PCE is derived from those reports. As the graph below shows, the median estimate is .24% for the headline PCE figure and .20% for the core PCE. Such a trend would continue to point to sticky inflation, but not an upward trend as some fear.
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