When the Tried and True is Really Just Tried but Tired!
There’s a long-standing investment adage that the markets are considered to be in a healthy state when the soldiers (the small cap stocks) are advancing along with the generals (the large cap stocks).
And the opposite is also believed, things aren’t very healthy when both aren’t moving in tandem.
So, is this idea true or not?
And why am I talking about it now?
It’s because the markets had their worst week of the year and there’s some speculation that perhaps the excitement over Trump’s influence on the markets may be waning.
Some analysts have noted that small cap stocks are lagging the large cap universe this first quarter, even though they outperformed last year.
So market researcher Mark Hulbert decided to put the adage to the test and you might find his results surprising.
As shown on the following chart, it turns out that the S&P 500 actually has had (on average) the best future 3-month performance when large caps have outperformed small caps by more than 5% in the trailing 3-months.
For those of you who might not be familiar with the abbreviations, the SPX stands for the S&P 500 index and RUT is the Russell 2000 index of small cap stocks.
So, that old generals and soldiers analogy does not hold up to at least this one statistical test.
This is just another situation where some skepticism is a healthy thing. Just because people believe something is true doesn’t make it so.
As I said in the title, tried and true is just tired in this case.