Old Wall Street Adage Suggests Market May Be Reaching A Peak

“If large caps beat small caps in January, that trend will continue throughout the year.” That’s an old Wall Street adage. The question remains whether it will be on the money this year.

According to the Financial Times, the Russell 2000 index, which is made up of small- and mid-cap stocks, fell .3 percent in January compared to a rise of 2.7 percent for the Dow Jones Industrial Average and a 2.3 percent rise in the Standard & Poor’s 500.  This is a sign investor optimism is declining, according to the Times story (http://www.ft.com/cms/s/0/a0e32be2-2e26-11e0-8733-00144feabdc0.html#axzz1DK6KY7ps). 

Also cited in the Times article is a Bank of America Merrill Lynch report noting that fourth quarter earnings from smaller companies in January trailed fourth quarter earnings from larger companies for the first time since 2008. If this small cap underperformance keeps going, as the adage indicated it may, many investors believe it’s an indication that the recovery phase of the U.S. economy is ebbing and riskier times are ahead.

In general, superior earnings from larger cap stocks tend to depress investment in shares of smaller caps. That’s because investors believe that the market is maturing or topping off, prompting a move toward safer, large cap stocks, according to the FT.


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