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Abstract
This article examines the behavior of the small-capitalization stock return cycle. The authors compare the period 1980–2020 with a study for the period 1960–1995. They find that in earlier period small-cap stocks earned a return premium when the economy was rising, long-term rates were rising, the US dollar was rising, and market volatility was falling. During the last decade, a strong move in large-cap stocks dwarfed the small-cap premium. The authors conjecture that a change in the character of economic growth, rising long-term rates, and oversold small-cap conditions may reverse this.
TOPICS: Portfolio theory, portfolio construction, wealth management
Key Findings
• The small-cap premium appears to have waned in the last 20 years.
• The premium is, however, still related to economic cycles.
• Economic conditions and valuations now favor a small-stock premium.
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