Friday, May 7, 2010

Large Cap Stocks Poised for Growth? Is this 1983 All Over Again?

I just read this Morningstar article, titled 1983 Revisited that I thought I'd share. The author makes the case for large cap stocks by drawing a number of comparisons to the early 1980's and 2008-2010, and what happened from 1983-1987.

By now, the parallels to the early 80's are seemingly everywhere. Mostly by way of comparing that recession to the current one, but I've also been seeing a lot of comparisons to the stock market of the day as well. Here are some of the comparisons raised in the article:

  • Small cap stocks had been on a tear for a number of years, and led the market out of the bear market in 1982.

  • As a result, large cap stocks were under valued compared to small cap stocks.

  • For the 1st 9 months of the '82-'87 bull market, small caps outperformed large caps and small cap stocks like Apple quadrupled in value.

  • Small caps have dramatically outperformed large caps since 2000.

Indeed, it's that last point that seems to sum up much of the talk I've been reading about large vs. small cap stocks - the small cap bull is long in the tooth, and it's just time for large caps to take the reigns.

Is that true?

I don't know. I'm not a pro, and I doubt any of the pros really know for sure. It's easy to say that small cap stocks typically lead the rally, then get out of the way as the economy picks up steam and large caps charge back. But these are also not typical times, so who really knows.

Also, while much of the early 80's economic news was dominated by extremely high unemployment, much was also focused on extremely high inflation and interest rates left over from the 1970's stagflation era. Inflation and interest rates are about as far from that environment as this country has seen in generations, and I wonder how much of the stock market and large cap performance was due to the fed breaking the back of inflation. In which case, does the period from 1983 -1987 bear any resemblance on the next 5 years?


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