why are Small Caps falling?

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stocknoob4111
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why are Small Caps falling?

Post by stocknoob4111 » Thu Jun 06, 2019 3:42 pm

Just curious as to why Small Caps are falling when the rest of the market is going up? The factors that are favorable to Small Caps are in the news:

- Expectation of a rate cut which is hugely favorable to Small Caps
- Trade war fears also favor Small Caps as they are somewhat insulated (not fully but better than Large Caps)
- Slowing ex US growth relative to US, should favor Small Caps as they are not directly exposed to International demand

These very same factors caused the huge rally in Small Caps mid 2018 yet it's having the opposite effect now...

Wondering what is driving negative sentiment in this sector currently? As of today S&P 600 is almost in bear market territory..

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vineviz
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Re: why are Small Caps falling?

Post by vineviz » Thu Jun 06, 2019 3:51 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 3:42 pm
Just curious as to why Small Caps are falling when the rest of the market is going up?
I caution you to avoid speaking about markets in the present tense, because it can cause confusion and muddled thinking. There is the past (what stocks HAVE done) and the future (what stocks WILL do), but not really a present. For the most part, trends or "new regimes" are an illusion created by the mid from random events.

Also, what past time period are you looking at?

Today? Just noise.

The past month? Most categories of US stocks, including large caps, are down over that period.

Year-to-date? Most categories of US stocks, including small caps, are up over that period.

One year? Large caps have outperformed small caps.

Five years? Large caps have outperformed small caps.

Ten years? Small caps have outperformed large caps.

Fifteen years? Small caps have outperformed large caps.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: why are Small Caps falling?

Post by livesoft » Thu Jun 06, 2019 3:57 pm

I think the reason is that the other day small caps went way up compared to the "rest of the market." So things are just getting back to where fluctuations would have them. There's really nothing to read into this other than you probably don't follow things close enough, so you need to look more often to see the ebb and flow of various asset classes.
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Re: why are Small Caps falling?

Post by stocknoob4111 » Thu Jun 06, 2019 4:18 pm

I'm actually comparing it to the all time highs.

The S&P 500 is -3.4% from it's all time high
The S&P 600 is -17% from it's all time high

That is a HUGE difference. I do understand that each index has reasons for going up or down but I would think the factors in the market favor a divergence opposite to what is happening currently - i.e. the Small Caps should've been closer to their all time highs and the Large Caps should've been quite off their highs due to the factors I mentioned above.

Also, those factors did send the Small Caps much higher than Large Caps last year but not this year.

Just trying to understand the factors that influence the divergences.

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Re: why are Small Caps falling?

Post by rascott » Thu Jun 06, 2019 4:34 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 4:18 pm
I'm actually comparing it to the all time highs.

The S&P 500 is -3.4% from it's all time high
The S&P 600 is -17% from it's all time high

That is a HUGE difference. I do understand that each index has reasons for going up or down but I would think the factors in the market favor a divergence opposite to what is happening currently - i.e. the Small Caps should've been closer to their all time highs and the Large Caps should've been quite off their highs due to the factors I mentioned above.

Also, those factors did send the Small Caps much higher than Large Caps last year but not this year.

Just trying to understand the factors that influence the divergences.


Haven't broken it down that much. 1 year is noise....basically the hot girl of the year.

AMD is up like 7% today. What's that mean?

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Re: why are Small Caps falling?

Post by ohai » Thu Jun 06, 2019 4:34 pm

Hi, this is a good question. On a fundamental level, earnings for small caps in the past 6 months have failed to meet expectations, while large caps have performed well. Why has this happened is less clear, but two clear factors are: 1) sensitivity of small caps to import costs, which will increase when Trump implements tariffs, and 2) sensitivity to interest rates, which are still higher than in 2018, despite having fallen recently. There is probably some kind of sector rotation that disadvantages small caps too - for instance growth to consumer staples.

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Re: why are Small Caps falling?

Post by nedsaid » Thu Jun 06, 2019 4:43 pm

I don't know, maybe there are more sellers of Small-Caps than buyers and perhaps prices have to fall enough so that sell and buy orders are in balance again. Just a thought. A sophisticated way of saying that I don't know. Could be as simple as a hedge fund unwinding a position that they don't want anymore. Another thought is that asset classes fall in and fall out of favor. A flavor of the month kind of thing. Not always easy to figure out the why.

If I had to guess, the market might be anticipating an economic slowdown and market participants are moving to the larger stocks for defensive reasons.
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Re: why are Small Caps falling?

Post by nisiprius » Thu Jun 06, 2019 4:55 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 3:42 pm
Just curious as to why Small Caps are falling when the rest of the market is going up? The factors that are favorable to Small Caps are in the news:

- Expectation of a rate cut which is hugely favorable to Small Caps
- Trade war fears also favor Small Caps as they are somewhat insulated (not fully but better than Large Caps)
- Slowing ex US growth relative to US, should favor Small Caps as they are not directly exposed to International demand

These very same factors caused the huge rally in Small Caps mid 2018 yet it's having the opposite effect now...

Wondering what is driving negative sentiment in this sector currently? As of today S&P 600 is almost in bear market territory..
Try to let go of the idea that you, or anybody else, actually understands "the factors that are favorable to small caps." And that you, or anybody else know what "caused" the huge rally in small caps mid 2018.
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Re: why are Small Caps falling?

Post by vineviz » Thu Jun 06, 2019 5:13 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 4:18 pm
I'm actually comparing it to the all time highs.

The S&P 500 is -3.4% from it's all time high
The S&P 600 is -17% from it's all time high

That is a HUGE difference.
You're effectively looking at 9 months of data, and IMHO seeing a pattern in what is likely just noise.

Even people who make careers out of explaining why markets did what they did are wrong way more often than right.

Any inquiry should start with a more basic question: is this pattern unusual? What are the odds, for instance, that over any give 9 month period the S&P 500 and S&P 600 will have returns that diverge by 13 percentage points or more? Pretty high, it turns out: this level of divergence happens about 15% of the time, or pretty much once a year on average.

Not coincidently, that's about how often it would happen just by random chance.

If you've never read the book Fooled by Randomness by Nassim Nicholas Taleb, I highly recommend it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: why are Small Caps falling?

Post by stocknoob4111 » Thu Jun 06, 2019 5:15 pm

nisiprius wrote:
Thu Jun 06, 2019 4:55 pm
Try to let go of the idea that you, or anybody else, actually understands "the factors that are favorable to small caps." And that you, or anybody else know what "caused" the huge rally in small caps mid 2018.
Not claiming I understand this, I have no idea... I am repeating what I have read in the media (Marketwatch and CNBC) which have listed these as the factors.
vineviz wrote:
Thu Jun 06, 2019 5:13 pm
If you've never read the book Fooled by Randomness by Nassim Nicholas Taleb, I highly recommend it.
Thanks for the recommendation, does sound like a good read! :beer

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Re: why are Small Caps falling?

Post by vineviz » Thu Jun 06, 2019 5:22 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 5:15 pm
nisiprius wrote:
Thu Jun 06, 2019 4:55 pm
Try to let go of the idea that you, or anybody else, actually understands "the factors that are favorable to small caps." And that you, or anybody else know what "caused" the huge rally in small caps mid 2018.
Not claiming I understand this, I have no idea... I am repeating what I have read in the media (Marketwatch and CNBC) which have listed these as the factors.
Yeah, reading stories in the media probably costs investors billions every year in unforced errors.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: why are Small Caps falling?

Post by RCL » Thu Jun 06, 2019 5:29 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 4:18 pm
I'm actually comparing it to the all time highs.
I don't think comparing anything to an all time high or all time low has meaning.
I know, I know, things like "we are in a correction" use this criteria....to me, an all time high or all time low is just an anomaly.
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Re: why are Small Caps falling?

Post by tesuzuki2002 » Thu Jun 06, 2019 5:40 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 3:42 pm
Just curious as to why Small Caps are falling when the rest of the market is going up? The factors that are favorable to Small Caps are in the news:

- Expectation of a rate cut which is hugely favorable to Small Caps
- Trade war fears also favor Small Caps as they are somewhat insulated (not fully but better than Large Caps)
- Slowing ex US growth relative to US, should favor Small Caps as they are not directly exposed to International demand

These very same factors caused the huge rally in Small Caps mid 2018 yet it's having the opposite effect now...

Wondering what is driving negative sentiment in this sector currently? As of today S&P 600 is almost in bear market territory..
I disagree that these 3 factors have any more influence to Small Caps than other factors...

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Re: why are Small Caps falling?

Post by whodidntante » Thu Jun 06, 2019 5:54 pm

I would think more about the future than recent price action unless you are a trader. It's fine to be a trader, but you'll be pretty lonely here. I don't know if your thesis is correct or not OP. But I do want to own small-cap stocks, and the fact that they've gone down makes me want to buy more, not sell.

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Re: why are Small Caps falling?

Post by goingup » Thu Jun 06, 2019 6:16 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 3:42 pm
As of today S&P 600 is almost in bear market territory..
I'm too lazy to fact-check this, but my small cap blend fund is less than 10% below it's all-time high of August 2018. Not in bear territory at all by my reckoning, Still well ahead of SP500 in 2019. Nothing unusual here as small cap funds fluctuate more.

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Re: why are Small Caps falling?

Post by SovereignInvestor » Thu Jun 06, 2019 6:22 pm

To start 2017 small caps traded at a 15% forward PE premium to large caps. Most of the relative underperformane was valuaton convergence.

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Re: why are Small Caps falling?

Post by nisiprius » Thu Jun 06, 2019 6:27 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 5:15 pm
nisiprius wrote:
Thu Jun 06, 2019 4:55 pm
Try to let go of the idea that you, or anybody else, actually understands "the factors that are favorable to small caps." And that you, or anybody else know what "caused" the huge rally in small caps mid 2018.
Not claiming I understand this, I have no idea... I am repeating what I have read in the media (Marketwatch and CNBC) which have listed these as the factors.
The financial media are pure noise. Tune them out.

1: Nassim Nicholas Taleb noted:
In 'The Black Swan', Nassim Nicholas Taleb wrote:One day in December 2003, when Saddam Hussein was captured, Bloomberg News flashed the following headline at 13:01: U.S. Treasuries Rise; Hussein Capture May Not Curb Terrorism. ... Half an hour later, they had to issue a new headline. As these U.S. Treasury bonds fell in price (they fluctuate all day long, so there was nothing special about that), Bloomberg News had a new reason for the fall: Saddam's capture (the same Saddam). At 13:31 they issued the next bulletin: U.S. Treasuries Fall; Hussein Capture Boosts Allure of Risky Assets. So it was the same capture (the cause) explaining one event and its exact opposite.
2: Jeremy Siegel noted:
In 'Stocks for the Long Run,' Jeremy Siegel wrote:On November 15, 1991, when the Dow fell more than 120 points, or nearly 4 percent, Investor's Business Daily ran an article about the market entitled "Dow Plunges 120 in a Scary Stock Sell-Off: Biotechs, Programs, Expiration and Congress Get the Blame." In contrast, the London-based Financial Times published a front-page article by a New York writer entitled "Wall Street Drops 120 Points on Concern at Russian Moves." What is interesting is that such news, specifically that Russian government had suspended oil licenses and taken over the gold supplies, was not mentioned even once in the Investor's Business Daily article!
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Re: why are Small Caps falling?

Post by hdas » Thu Jun 06, 2019 7:10 pm

vineviz wrote:
Thu Jun 06, 2019 3:51 pm
Fifteen years? Small caps have outperformed large caps.
Well, this is disputable. Take Russell 1000 vs Russell 2000. Large Caps still beat small caps by a a hair. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: why are Small Caps falling?

Post by vineviz » Thu Jun 06, 2019 7:41 pm

hdas wrote:
Thu Jun 06, 2019 7:10 pm
vineviz wrote:
Thu Jun 06, 2019 3:51 pm
Fifteen years? Small caps have outperformed large caps.
Well, this is disputable. Take Russell 1000 vs Russell 2000. Large Caps still beat small caps by a a hair. :greedy
Nobody I care about cares about the Russell 2000 ;)
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Re: why are Small Caps falling?

Post by CoastalWinds » Thu Jun 06, 2019 8:00 pm

Because I tilted towards them, that’s why they’re flailing.

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Re: why are Small Caps falling?

Post by stocknoob4111 » Thu Jun 06, 2019 9:45 pm

Anyone have data on what has been the largest historical divergence in rolling 10 year periods between Large and Small?

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Re: why are Small Caps falling?

Post by Northern Flicker » Thu Jun 06, 2019 10:04 pm

- Expectation of a rate cut which is hugely favorable to Small Caps
- Trade war fears also favor Small Caps as they are somewhat insulated (not fully but better than Large Caps)
- Slowing ex US growth relative to US, should favor Small Caps as they are not directly exposed to International demand
It is erroneous thinking to believe that you can predict small-cap outperformance from these types of considerations.

For instance:

We don’t know what market expectations are for a rate cut, nor do we know that small-caps will over-perform if it materializes.

It also has become clear that smaller companies may be as exposed to the risk of tariffs as large companies.

Lastly, it is quite common for a more risky equity asset class to rise at a faster rate than the market when the market is rising and fall more steeply when the market is falling. The behavior of small caps over the last year and a half has been consistent with that behavior. Riskier assets are more volatile than less risky assets.
Last edited by Northern Flicker on Fri Jun 07, 2019 12:17 am, edited 3 times in total.

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Re: why are Small Caps falling?

Post by hdas » Thu Jun 06, 2019 10:20 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 9:45 pm
Anyone have data on what has been the largest historical divergence in rolling 10 year periods between Large and Small?
Not exactly, but check this thread :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: why are Small Caps falling?

Post by Jags4186 » Thu Jun 06, 2019 11:34 pm

Small cap stocks have a higher expected return and more risk. What we’re experiencing is the risk of the higher expected returns. Hopefully we will see a payoff in the future.

This is the difficulty of doing slice and dice. When the SP500 is performing best you feel like a jerk owning anything else. SP500 has been doing great for 10 years.

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Re: why are Small Caps falling?

Post by vineviz » Fri Jun 07, 2019 7:33 am

stocknoob4111 wrote:
Thu Jun 06, 2019 9:45 pm
Anyone have data on what has been the largest historical divergence in rolling 10 year periods between Large and Small?
Over 1,000%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

David Althaus
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Re: why are Small Caps falling?

Post by David Althaus » Fri Jun 07, 2019 8:33 am

If you invest this way willingness to live with long periods of underperformance is essential. You angst will probably increase as you age. Consider: VTI as your stock holding and rest easy knowing every year your portfolio will outperform 70% of all money managers, about 90% over five years, and about 99% over ten years. You can sleep well and have a record to emulate.

All the best

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Re: why are Small Caps falling?

Post by KlangFool » Fri Jun 07, 2019 8:42 am

OP,

I know that I don't know. I know that if I really know, I would be rich just by trading the stock. So, if anyone claimed that they know and they are not rich and retired at some beaches, they are lying.

KlangFool

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Re: why are Small Caps falling?

Post by stocknoob4111 » Fri Jun 07, 2019 12:44 pm

David Althaus wrote:
Fri Jun 07, 2019 8:33 am
If you invest this way willingness to live with long periods of underperformance is essential.
yep, I understood this going in... I actually reallocated from 100% of my US equity allocation in S&P 500 to 50% in SP 500 and 50% in SP 600 in late Jan of this year with the understanding that there could and will be divergences along the way. I am fine with it. Obviously we take risk for gain not for amusement... from the vast amount of material I had researched (from Merriman et al) I do believe there is a Small premium in the long run and I plan to hold my positions for at least 20 years if not more.

Of course past does not guarantee future etc. etc. but my thesis is that at the very least Small will not significantly underperform Large.

I hear a lot of people make this argument that when you diversify to Small be prepared to deal with long periods of underperformance, however this ignores the fact that Large could underperform Small for long periods as well so the argument works both ways. So we could say, if you hold only Large then be prepared to deal with extended periods of underperformance relative to Small.

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Re: why are Small Caps falling?

Post by KlangFool » Fri Jun 07, 2019 12:59 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 12:44 pm

Of course past does not guarantee future etc. etc. but my thesis is that at the very least Small will not significantly underperform Large.

however this ignores the fact that Large could underperform Small for long periods as well so the argument works both ways.
stocknoob4111,

A) but my thesis is that at the very least Small will not significantly underperform Large.

B) however this ignores the fact that Large could underperform Small for long periods as well so the argument works both ways.

(A) and (B) could not be true at the same time.

If you choose (A), it means that you can predict the future.

If you choose (B), it means that you know nothing.

KlangFool

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Re: why are Small Caps falling?

Post by stocknoob4111 » Fri Jun 07, 2019 1:05 pm

KlangFool wrote:
Fri Jun 07, 2019 12:59 pm
stocknoob4111,

A) but my thesis is that at the very least Small will not significantly underperform Large.

B) however this ignores the fact that Large could underperform Small for long periods as well so the argument works both ways.

(A) and (B) could not be true at the same time.

If you choose (A), it means that you can predict the future.

If you choose (B), it means that you know nothing.

KlangFool
To clarify I meant, at the very least Small will not significantly underperform Large in a long time frame (10+ years). By significant I mean for example I think it's unlikely that over a decade Large will return CAGR 9% and Small with return CAGR 2%. It is speculation of course based on what has happened in history, I can't predict the future.

With regard to B) I don't understand your comment, what do you mean by "I know nothing?". Historically there have been periods where Large underperformed Small. My point is the converse of the statement "be prepared for long periods of underperformance if you hold Small" is true as well unless you are stating that Large always outperforms Small in which case you are predicting the future as well which of course you can't.

We don't know which asset class will perform the best, hence the diversification and not putting all eggs in a single basket.

So here is my statement: If you hold only Large, then be prepared for long periods of underperformance relative to Small

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Re: why are Small Caps falling?

Post by KlangFool » Fri Jun 07, 2019 1:27 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 1:05 pm
KlangFool wrote:
Fri Jun 07, 2019 12:59 pm
stocknoob4111,

A) but my thesis is that at the very least Small will not significantly underperform Large.

B) however this ignores the fact that Large could underperform Small for long periods as well so the argument works both ways.

(A) and (B) could not be true at the same time.

If you choose (A), it means that you can predict the future.

If you choose (B), it means that you know nothing.

KlangFool
To clarify I meant, at the very least Small will not significantly underperform Large in a long time frame (10+ years). By significant I mean for example I think it's unlikely that over a decade Large will return CAGR 9% and Small with return CAGR 2%. It is speculation of course based on what has happened in history, I can't predict the future.
stocknoob4111,

You have to choose

A) You can predict the future

or

B) Small can significantly underperform Large in a long time frame (10+ years).

(A) or (B). You cannot have both.

KlangFool

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Re: why are Small Caps falling?

Post by Kevin M » Fri Jun 07, 2019 1:31 pm

Different definitions of small-cap and large-cap make a significant difference.

As of now, Vanguard small-cap ETF, VB, is about 7.9% below its 52-week high, while Vanguard large-cap, VV, is about 2.2% below its 52-week high. So the difference is not nearly as large as for your S&P numbers.

Looking at it from another perspective, VB (small) is about 23.5% above its 52-week low, while VV (large) is about 23.3% above its 52-week low. So not much difference when viewed from this perspective.

Looking at the two perspectives together, one could say that it demonstrates higher volatility of small caps.

I'm in the camp that believes news media explanations are usually BS, and I just chuckle at them.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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Re: why are Small Caps falling?

Post by asif408 » Fri Jun 07, 2019 2:19 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 1:05 pm
To clarify I meant, at the very least Small will not significantly underperform Large in a long time frame (10+ years). By significant I mean for example I think it's unlikely that over a decade Large will return CAGR 9% and Small with return CAGR 2%. It is speculation of course based on what has happened in history, I can't predict the future.
Only problem is that has already happened. Vanguard's Small Cap Index Fund (NAESX) has underperformed it's S&P 500 index fund (VFINX) since July 1983: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D. 36 years seems like a pretty long time.

You can find decade long spans during that time it has underperformed, such as this 14 year period from March 1985 to December 1999: https://www.portfoliovisualizer.com/bac ... 0&total3=0, where large cap had a 7% CAGR advantage over small cap. So your 9% vs. 2% scenario is not out of the realm of possibility.

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Re: why are Small Caps falling?

Post by stocknoob4111 » Fri Jun 07, 2019 3:03 pm

asif408 wrote:
Fri Jun 07, 2019 2:19 pm
if we cherry pick dates I think we can come to just about any conclusion, which is why I was looking for data on 10 year rolling returns which I did find. I did see this data before when doing my research:

Source: https://www.firstwilshire.com/small-val ... r-returns/

Image

It would be nice to get a 10 year rolling chart of Small Blend vs Large Blend as well but I can't seem to find such a chart or table. I am interested in seeing the rolling return differentials between the two and the extent of those differentials.
KlangFool wrote:
Fri Jun 07, 2019 1:27 pm
stocknoob4111,

You have to choose

A) You can predict the future

or

B) Small can significantly underperform Large in a long time frame (10+ years).

(A) or (B). You cannot have both.

KlangFool
I understand what you are saying, obviously one cannot predict the future BUT my point is not that. By your own criteria if one chooses B), i.e. Small CAN significantly underperform Large THEN by virtue of the negation of A) i.e. One CANNOT predict the future and applying logic the CONVERSE of B) has to hold true as well i.e. B) Large can significantly underperform Small in a long time frame (10+ years)

My point is the diversification benefit over the longer time frame. The point of this thread is to not argue about the diversification benefit, I do think it exists and I feel it's better to hold Large+Small vs just Large or Just Small. This article states my thoughts quite nicely:

Source: https://awealthofcommonsense.com/2015/0 ... p-premium/

But I think it makes sense to invest in small caps whether they earn a premium over large caps in the future or not. This is because they provide diversification benefits. Take a look at the cyclical nature of the return numbers on the Vanguard Small Cap Index Fund and the S&P 500 over the years:

The original question of the thread was to understand what factors are causing divergences between the two and what has been the maximum historical divergence between the two in rolling 10 year periods.

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Re: Why are Small Caps falling?

Post by Taylor Larimore » Fri Jun 07, 2019 3:13 pm

Why Are Small Caps Falling?
stocknoob4111:

Total Market Index Fund investors don't know and don't care. Jason Zweig explains:

I Don't Know, I Don't Care.

Best Wishes
Taylor
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Re: why are Small Caps falling?

Post by DaftInvestor » Fri Jun 07, 2019 3:21 pm

I hold Small Cap Value (VSIAX). 10 Year average is 13.30% yearly. Hardly failing in my eyes.
Looking at total market (VTSAX) 10 year average is 13.98%. Would have been better simply holding total market but maybe not in next 10 years.
I have a slight-tilt toward SCV based upon research in several books I have read.

I'll update you again in 10 years and 20 years on whether or not my slight SCV panned out. Until then - if you are reacting to something in the last 30 days, 90 days or 180 days - I don't care :)

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Re: why are Small Caps falling?

Post by vineviz » Fri Jun 07, 2019 3:26 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 3:03 pm
It would be nice to get a 10 year rolling chart of Small Blend vs Large Blend as well but I can't seem to find such a chart or table. I am interested in seeing the rolling return differentials between the two and the extent of those differentials.
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Re: why are Small Caps falling?

Post by GoldenFinch » Fri Jun 07, 2019 3:33 pm

I just buy whatever is down. So small caps look okay, but not great.

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Re: why are Small Caps falling?

Post by KlangFool » Fri Jun 07, 2019 3:42 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 3:03 pm

I feel it's better to hold Large+Small vs just Large or Just Small.
stocknoob4111 ,

Large + small = Total market. So, what is your point again?

I know that I am tilted to Small Cap Value. I know that I cannot predict the future. I know that my tilting may result in tracking error = underperformance over a very long period of time. And, I may suffer losses from my tilting.

I am taking a gamble that I may lose.

What is your position?

By the way, my 10% Small Cap Value is part of my mini Larry portfolio. It is matched by 10% intermediate term treasury bond fund.

KlangFool

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Why are Small Caps falling? -- The solution

Post by Taylor Larimore » Fri Jun 07, 2019 6:52 pm

Bogleheads:

This is a stressful time for owner's of Small-Cap factor stocks. Own the market (as our mentor recommends) and you will avoid the stress of market under-performance.

Best wishes.
Taylor
Last edited by Taylor Larimore on Fri Jun 07, 2019 7:21 pm, edited 1 time in total.
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Re: why are Small Caps falling?

Post by nisiprius » Fri Jun 07, 2019 7:18 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 1:05 pm
...To clarify I meant, at the very least Small will not significantly underperform Large in a long time frame (10+ years)...
DFSCX, the DFA US Micro Cap Portfolio, is a famous, old, well-regarded small-cap fund, probably the first fund to systematically exploit the "small-firm effect" as it was then known. It has one of the strongest small-cap tilts available, and one of the highest loadings on the size factor available.

Image

Here is the comparative performance of DFSCX (blue) and the Vanguard 500 Index Fund, a large-cap blend fund (orange) from 1984 through 2000, inclusive.

Source

Image

1. How many years are there in the period 1984-2000, inclusive?

2. Did the small-cap fund underperform the large-cap fund?

3. A $10,000 investment in the small-cap fund would have grown to $59,847. A $10,000 investment in the large-cap fund would have grown to $125,996, twice as much. The average annual return of the small-cap fund was 4.4% lower than that of the large-cap fund. Do you consider this to be "significant" underperformance?
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Re: why are Small Caps falling?

Post by Northern Flicker » Fri Jun 07, 2019 7:25 pm

asif408 wrote:
Fri Jun 07, 2019 2:19 pm
stocknoob4111 wrote:
Fri Jun 07, 2019 1:05 pm
To clarify I meant, at the very least Small will not significantly underperform Large in a long time frame (10+ years). By significant I mean for example I think it's unlikely that over a decade Large will return CAGR 9% and Small with return CAGR 2%. It is speculation of course based on what has happened in history, I can't predict the future.
Only problem is that has already happened. Vanguard's Small Cap Index Fund (NAESX) has underperformed it's S&P 500 index fund (VFINX) since July 1983: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D 36 years seems like a pretty long time.
It’s even worse than that. If you cherry pick the start date to favor small caps by setting it at 1/1/1977 so that the period 1977-1983 where small caps exploded is included in the backtest, NAESX still underperformed:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I’m not sure NAESX was the best way to harvest the small-cap factor however— it has been a small-mid fund since it started tracking the CRSP indices, and tracked the Russell 2000 for a good period of time when that index was known to be susceptible to front-running.

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Re: why are Small Caps falling?

Post by stocknoob4111 » Fri Jun 07, 2019 7:44 pm

Northern Flicker wrote:
Fri Jun 07, 2019 7:25 pm
/1/1977 so that the period 1977-1983 where small caps exploded is included in the backtest, NAESX still underperformed:
A Asset backtest in Portfolio Visualizer shows that Small Caps most definitely beat large caps between 1/1/1977-date and by a HEFTY margin CAGR of 12.54% for Small vs 10.83% for Large. Perhaps there is something abnormal with that particular fund?

https://tinyurl.com/y6829zp5

In addition, the Callum periodic table gives us some handy information here:

Image

Small beats Large in 99, 00, 01, 02, 03, 04, 06, 08, 09, 10, 12, 13, 16 which is 62% of this almost 2 decade period. Now, I am not saying this is proof that Small beats Large all the time or if it will repeat in the future, obviously I can't predict that but the point is that you can cherry pick dates to your liking to get any desired result in favor of any asset class.

In the period 99-19 Large has underperformed Small and that is just a fact which we can't dispute as the historical data shows.
Last edited by stocknoob4111 on Fri Jun 07, 2019 7:51 pm, edited 3 times in total.

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Re: why are Small Caps falling?

Post by abuss368 » Fri Jun 07, 2019 7:46 pm

stocknoob4111 wrote:
Thu Jun 06, 2019 3:42 pm
Just curious as to why Small Caps are falling when the rest of the market is going up? The factors that are favorable to Small Caps are in the news:

- Expectation of a rate cut which is hugely favorable to Small Caps
- Trade war fears also favor Small Caps as they are somewhat insulated (not fully but better than Large Caps)
- Slowing ex US growth relative to US, should favor Small Caps as they are not directly exposed to International demand

These very same factors caused the huge rally in Small Caps mid 2018 yet it's having the opposite effect now...

Wondering what is driving negative sentiment in this sector currently? As of today S&P 600 is almost in bear market territory..
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Re: why are Small Caps falling?

Post by abuss368 » Fri Jun 07, 2019 7:47 pm

Could it be that more folks are investing in small value over the past 20 years? Is the risk premium gone or reduced? No one knows. An investor must be willing to stay the course for the long haul.
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Re: why are Small Caps falling?

Post by stocknoob4111 » Fri Jun 07, 2019 7:48 pm

abuss368 wrote:
Fri Jun 07, 2019 7:46 pm
Invest in Total Market Index funds and do not worry about subsets. Keep investing simple.
You mean a Total Market Fund like VTSAX? VTSAX has a 100% correlation with the S&P 500, just do a asset correlation test in Portfolio Visualizer from 1993 it has a virtually identical return and if you analyze the graph it tracks with 99+% of the S&P 500 in all time periods so it's pointless to own a "Total Market".

Paul Merriman had a podcast about this that Total Market isn't infact Total Market at all and if you want to actually own the Total Market across different sectors you need dedicated cap funds and I totally agree with him as the correlation test proves.

I believe his argument was that there was just too little Small and Mid cap exposure to make any significant difference in outcome.

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Re: why are Small Caps falling?

Post by abuss368 » Fri Jun 07, 2019 7:50 pm

stocknoob4111 wrote:
Fri Jun 07, 2019 7:48 pm
abuss368 wrote:
Fri Jun 07, 2019 7:46 pm
Invest in Total Market Index funds and do not worry about subsets. Keep investing simple.
You mean a Total Market Fund like VTSAX? VTSAX has a 100% correlation with the S&P 500, just do a asset correlation test in Portfolio Visualizer from 1993 it has a virtually identical return and if you analyze the graph it tracks with 99+% of the S&P 500 in all time periods so it's pointless to own a "Total Market".

Paul Merriman had a podcast about this that Total Market isn't infact Total Market at all and if you want to actually own the Total Market across different sectors you need dedicated cap funds and I totally agree with him as the correlation test proves.
Taylor Larimore has posted (and I can not locate it right now but perhaps he will see the post) a research study on the many advantages of Total Market investing.
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Re: why are Small Caps falling?

Post by stocknoob4111 » Fri Jun 07, 2019 7:55 pm

abuss368 wrote:
Fri Jun 07, 2019 7:50 pm
Taylor Larimore has posted (and I can not locate it right now but perhaps he will see the post) a research study on the many advantages of Total Market investing.
Here is Merriman's good article about the topic which I found interesting. He had a podcast as well which goes into more detail but I can't seem to locate it :) Sure, I would like to hear arguments why anyone would hold VTSAX for diversification purposes, I own VTSAX and I think it's terrific but not to truly capture Small or Mid cap return characteristics because it historically simply has not done that at all.

https://www.marketwatch.com/story/why-v ... 2014-12-03

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Re: why are Small Caps falling?

Post by Taylor Larimore » Fri Jun 07, 2019 8:25 pm

Abuss:
Taylor Larimore has posted (and I can not locate it right now but perhaps he will see the post) a research study on the many advantages of Total Market investing.
This post will have to do:

What Experts Say About Total Market Index Funds

Best wishes.
Taylor
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Re: why are Small Caps falling?

Post by Northern Flicker » Fri Jun 07, 2019 10:34 pm

A Asset backtest in Portfolio Visualizer shows that Small Caps most definitely beat large caps between 1/1/1977-date and by a HEFTY margin CAGR of 12.54% for Small vs 10.83% for Large.
I mentioned a couple of issues with NAESX. However, can you name a small-cap fund that I could have invested in that actually delivered the result in portfoliovisualizer? Does the PV data take into account the high trading costs and not very robust liquidity of small-caps during the first 15-20 years of that 42 year period?

The evidence seems to be that it is not easy to harvest a long-term small-cap factor premium with a small-cap blend portfolio. Some of the most recent research suggests it requires a concentration on micro-caps and robust quality screens.

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