Small caps best since the Nov election. Why?

[Lsbcal]

Since the November election it seems that small caps are now the clear winners. Then midcaps and lastly large caps. Large cap growth has lost it's mojo but still has good size gains. See the chart below comparing value and growth pairs of ETF's starting Oct 2020.

The best is small cap value (VBR) which took off in November. What I wonder is why after the November elections we see a very different spread. Maybe there is no easy answer other then large cap growth has run its course and the new money is finding better returns. Value investing has been out of favor for some years now and was crushed in March 2020.

Your guesses as to why this interesting trend?

All ETF's are Vanguard index funds.
Blue - small value
Purple - small growth
Light blue - midcap value
Pink - midcap growth
Orange - large cap growth
Yellow - large cap value

 

[audreyh1]

Well, they were way behind, as they were hit hardest by the COVID restrictions.

 

[Lsbcal]

Well, they were way behind, as they were hit hardest by the COVID restrictions.

But those small cap ETF's have average company market capitalizations of $5 billion. So not like restaurants or mom/pop operations.

I am guessing that yes, the return to business as usual due to the expectation of Covid reduction is a big factor. But why is this capitalization dependent? And why after the elections?

 

[flintnational]

In the south we have a saying, "Even a blind hog occasionally finds an acorn."

As an investor with a long term tilt to small cap value, I can somehow relate to the blind hog.

 

[Aerides]

IIRC small caps did well around 2013 as well. I don't know that I buy any direct linkage from the election (as most big investors baked their expectations in for that months in advance).

As Audrey indicates, if they were lower than others to start, they were probably better bets for bargains and short term growth - lower hanging fruit.

 

[OldShooter]

... Your guesses as to why this interesting trend?

Random noise. The same kind of noise that causes us to perceive hitting streaks or free throw streaks, neither of which exist.

I recommend a recent book I read: "The Drunkard's Walk, How Randomness Rules Our Lives" by Leonard Mlodinow. The gist of the books I have read, including Thaler and Kahneman, is that we humans have been bred by evolution to be pattern-seekers. To quickly recognize a situation by referring to a stored pattern may often mean survival. In modern times, though, this pattern-seeking also causes us to see patterns in what is actually random data. Which is most likely what this small stock "trend" is. No way to prove one way or another, though.

 

[6miths]

I figured it was Jupiter aligning with Mars again but I think OldShooter's explanation is most likely correct.

 

[24601NoMore]

VTMSX (VG Small Cap Tax Managed - strives to track the S&P Smallcap 600 index while minimizing tax consequences) is on fire for the year. Up 16.19% YTD, and that's after 11.05 in 2020 and 23.28 in 2019. 2018 was less kind with a -8.62% drop, but still..

I don't think it's "just" since the election, though, as VTMSX is up >18% annually for each of the past 5 years..

There's a little voice in the back of my head that keeps saying something along the lines of "this can't last..this can't last.."..but then again, I'm thinking that about the entire US equity markets at the moment..

 

[copyright1997reloaded]

Random noise. The same kind of noise that causes us to perceive hitting streaks or free throw streaks, neither of which exist.

I recommend a recent book I read: "The Drunkard's Walk, How Randomness Rules Our Lives" by Leonard Mlodinow. The gist of the books I have read, including Thaler and Kahneman, is that we humans have been bred by evolution to be pattern-seekers. To quickly recognize a situation by referring to a stored pattern may often mean survival. In modern times, though, this pattern-seeking also causes us to see patterns in what is actually random data. Which is most likely what this small stock "trend" is. No way to prove one way or another, though.

I see you have joined in yet another stock picking thread, telling everyone that stock picking is useless...

Here is why I started buying small caps starting around August/Sept 20:
1) The run up out of the deep COVID recession was mostly in large cap and stay-at-home stocks. Large cap because folks like HD, WMT, AMZN, et al were at a competitive advantage over places that were SHUT DOWN. Stay-at-home well, because we've all had to stay-at-home. But in late summer, things were starting to look better (at least for a while) so investors started looking at come-back plays.
2) 5 trillion $. There is so much money sloshing around in the system, and it has to go somewhere. Again, the Apple's, Amazon's, Netflix's of the world were already bid up so investors (and people with stimulus checks with no place to spend them) might start gravitating towards small cap issues.
3) The new administration: Promises of green industries, EV, legalized pot would light (pun intended) those industries on fire. In addition, states are desperate to get new tax revenues and things like POT legalization and on-line sports betting are ways to do so. So I (and many others) started looking into the next TSLA's (NIO, FIII, XL, CIIC, GIK, SOLO, and on - all EV plays), a bunch of gambling stocks (DKNG, ELYS, DMYD, BRGGF, ...) and pot stocks (both Canadian and the US MSO's like CRLBF) as well as suppliers/infrastructure (GRWG, VFF).

It is NOT random, it is psychological behavior of humans.

I have seen trading in the last couple of months some crazy crazy things. Things like a stock going up 45% in after hours because the "Robin Hood" buyers confused it's symbol with an Australian company which used that symbol. (I managed to short that in after hours for a tidy profit) (Symbol is OCC). Things like a stock going from 6 to 11 (again in after hours) because the EU approved a drug usage - while the usage was already expected and it should not have moved the stock AT ALL. (The stock is XERS, it has since traded back down to 6). (Disclaimer: Long XERS.) These are but two of many, and I've done the best I can to capitalize on these kinds of situations.

This is not "efficient market" behavior. It is behavior based on speculation, rumors, pumping of stocks in Twitter and on Discord servers. It is a market of emotion.




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[Lsbcal]

Thanks for your views on this copyright1997reloaded.

I posted this to get some ideas about why the market was seeming to turn towards small caps. There is now a preference for smaller capitalizations that may have been just coincidental with the election results. This is really just a curiosity question for discussion.

But I don't want to get into this with someone who continually posts the same Boglehead like religious views. If I wanted the Bogleheads type discussion I would go to that site. That information is well known and I can read various well known respected authors too (like Bogle, Bernstein, French/Fama, etc). And then there is all that academic stuff that I respect but seems to get twisted into "you cannot do this or that" by others.

So I hope we can allow this "Stock Picking and Market Strategy" to be a looser discussion of trading strategies and stock market ideas. I hope we do not get stuck in concrete. There are many ways to approach investing and I do not think there is math like proof to tell which is best.

 

[Montecfo]

I see you have joined in yet another stock picking thread, telling everyone that stock picking is useless...

I

Amen.

And OS should really start a new thread to make the case that those batting streaks are fake.

 

[plex]

I've held quite a tilt in SCV for awhile. SCV was doing really bad the last couple years, as Audrey said, this is basically just SCV making up for some lost ground, basically they were undervalued for a time. SCV still has a fair bit of ground to still make up if it wants to catch up to TSM (which is equivalent to something close to an average of the 6 funds above), which SCV is lagging by about 10% in growth. I hold SCV because I am fine with the additional risk/reward of small caps, as I have a very long investment horizon, and need funds that are on the higher side for dividend rates in my taxables.

 

[target2019]

I posted this to get some ideas about why the market was seeming to turn towards small caps. There is now a preference for smaller capitalizations that may have been just coincidental with the election results. This is really just a curiosity question for discussion.

I usually focus on the very long trend, that Small beats Large. I hold an institutional mixed fund like that, and it did quite well. But whatever the forces may be, Large Cap become super-sized.

At times I wondered if the long term normal would be seen again. But it does make another appearance.

In our total portfolio we do have a 15% tilt to Small/Mid.

As for persistent negative comments, they appear like bad weather. Not much can be done about that, other than ignore.

 

[RVplusDog]

As for persistent negative comments, they appear like bad weather. Not much can be done about that, other than ignore.

Well, we can also chuckle, shake our heads, or smile at the gentle posts calling people out on their inability to ignore certain threads.

 

[target2019]

Well, we can also chuckle, shake our heads, or smile at the gentle posts calling people out on their inability to ignore certain threads.

Not meaning to ruin Lsbcal's excellent thread, but I've heard there is a way to ignore threads and peeps.


A bit of on-topic irony is that I first learned of Small and REIT tilts on the B-heads forum. In fact these were recommended to me back in the day when I presented myself for portfolio dissection and lift.

 

[tdv2]

Certainly could be some mean reversion going on. Might also be a relief rally since, at least at the moment, business in the smaller cap companies is looking up.....especially if we get a big spending package. Whatever the case may be, I'll take it.

 

[Lsbcal]

Here is a 26 year view of several asset classes. These returns are shown relative to the SP500 which is "the market" large cap portfolio consisting of LV, LB and LG. These are mostly from Vanguard index funds (or ETFs) data with some MSCI index data for earlier years:

LV = vivax
LG = vigax
MV = vmvax
MG = vmgmx
SV = vsiax
SG = vsgax
Intl_large = vfwax
Intl_sm = vinex (active fund)

You can see the big move in large growth (LG) in the 1999 period and the recovery in value funds (SV,MV,LV) after that collapse. You can also see the small and midcap value (SV,MV) have done quite well over the entire period but have suffered in recent years.

 

[PussInBoots]

It is always the same. +1 @Lsbcal observation


On the long run small caps/mid caps outperform large caps. Long period of large caps outperforming small/mid caps will be followed by reversal.

 

[Lawrencewendall]

Yeah, this has been crazy. My small and mid cap (TSP S Fund) has almost doubled since the low of April 2020 and that is AFTER 3k a month distributions and a 30k transfer. Not complaining but it boggles the mind.

 

[dunkelblau]

Perhaps it's just a growing push towards the high end of the risk/reward spectrum? I'll bet micro/nano caps aren't included in the chart above because these aren't part of any index, and there's where I noticed behavior I've never seen before. The pink sheet sub-sub-penny space launched into synchronized large price gains across almost all names I follow (and I follow a lot of them). You can't buy these shares now for less than several times their 2020 lows, believe me I've tried and nothing fills. Pretty much the only place where you can buy shares not far above their annual lows is in some of the stalwarts such as the Dow dogs or depressed cyclicals, so this is where I'm shopping at the moment. No DD on my part for these megacaps because I'm of the opinion that this market segment is genuinely efficient unlike my usual haunts where adverse selection rules.

Or perhaps it's down to a change in sector mix within each cap range? The March crash in certain sectors such as energy, real estate, retail, etc, may have demoted enough names a notch or two in their capitalization, so the apparently V-shaped reflation bounce thus far may have disproportionately benefited the small end of the scale. The large cap stalwarts didn't fall nearly as much so saw less of a bounce.

I also wonder whether the past year's covid lifestyle adjustments has grown the pool of new players who buy first and learn the ropes later, or maybe it caused the existing pool to change behavior? Can prolonged lockdown induce pericula ludus? Is this decade going to be another roaring 20s? That $GME price spike a few weeks ago appeared on many others to a somewhat lesser degree going back to Halloween and haven't received press attention. Sure it's always been there to some degree, but I think the intensity and frequency of these moves are both unprecedented. Closest I can recall was 2nd half of 1999.

FWIW I've been getting up early every morning warming up the computer and getting ready to hit the sell button on whatever crap I've been holding for years that gets a big enough jump. These price surges were rare a year ago and they seemed unpredictable, but these days I think I see a repeating pattern in the price and volume that portends a selling opportunity-- it's when on several consecutive days the price ranges are rising (not necessarily the close) and their daily overlap is less than half there may be a large spike coming. Maybe this is obvious to experienced day traders, but I've never had to deal with so many of these so fast.

 

[P.S.]

...

This is not "efficient market" behavior. It is behavior based on speculation, rumors, pumping of stocks in Twitter and on Discord servers. It is a market of emotion.

I can guess what “should” be the long term expected results from following this. Nonetheless, the above process is what I used for GME and BB purchases, after having followed WSB for almost 2y, those were my first “plays.” Yes, it was probably a lotta luck, and probably a not insignificant amount of dumb. I would also say it was “work” being glued to a screen for about 100h.
My completely uneducated guess is that in 20y, looking back, a strong argument could be made for the factor of “retail”: social media, the globalization and access of retail sentiment, TikTok... what makes people tick.
Because what are company fundamentals based on? First the consumer does the actual buying/spending/consuming... then you throw it into the black box of a company’s financials... then out pops the info to analyze. Maybe the sentiment analysis will be legitimized only when algorithm-ized, and until then, those who utilize it will have an advantage.

 

[sengsational]

Looking at the 26 year history makes me think it's finally time for small cap value to recover from it's lackluster last many years.

 

[Lsbcal]

Looking at the 26 year history makes me think it's finally time for small cap value to recover from it's lackluster last many years.

That would be my guess too. But I tend to a structured approach to following trends rather then just guessing. Still cannot wring out all the risks in owning equities ... drat.

 

[Montecfo]

Small caps have been a staple of my investing for years. I think they have gotten cheap enough on a relative basis to be bought.

And as we can see there is some rotation out of large caps. This is to be expected.

In the short term, the market is a voting machine. In the long term it is a weighing machine, to paraphrase the great Ben Graham.

 

[Lsbcal]

The trends continue. This is a very unusual historic period as the Covid effect on economies is dominating. My guess is that we have this scenario:

1) DONE: growth stocks take off in lockdown
2) ON GOING: value stocks take off as vaccines start appearing and recovery anticipated
3) FUTURE: foreign developed country stocks take off when those countries (Japan, UK, EU) start getting better vaccine supplies

YTD performance through March 14, Vanguard funds:

Large growth = 1%
Large value = 11%

Small growth = 6%
Small value = 21%

Large International = 5%
Small International = 3%