Can Smaller Listed Companies Weather the Storm

Historically, the broad stock market has often been positive even at the start of economic recessions. But what about small cap stocks? Conventional wisdom holds that smaller companies often bear the brunt of economic downturns. So, what does the data tell us about the size premium when gross domestic product growth slows? 

Plotting annual return differences between small cap and large cap stocks against contemporaneous GDP growth for developed markets shows no discernible relation between the two. For example, there were 73 instances of a country experiencing a decline in GDP for the year. Small caps outperformed large caps in that country/year 47 out of those 73, or 64% of the time. That’s higher than the frequency across all country/year observations, which was 54%.

These results shouldn’t be too surprising, since markets are forward looking. As expectations for the future change, market prices continuously reset to a level where investors can expect positive premiums, including the size premium. This means small caps can still outperform, even if we eventually find ourselves in an environment unfavourable to small-company success.

You can read more about this here

For more information contact us here

*This information has been provided to us from Dimensional.