Small cap stocks continue to outperform large cap stocks

The five year graph below compares the relative strength of ‘small cap’ stocks versus ‘large cap’ stocks (red line) against the yield on a 10 year US government bond (white line). Pretty darn good fit up until the beginning of November 2020 (right side of graph) when small caps, and other ‘higher beta’ securities (think heavily shorted stocks) have been big outperformers (similar to energy stocks here at home). While a continuation of the ‘opening up’ trade can enable further short term upside to this trend, t’s logical to think that for this trend to continue beyond the short term, interest rates will need to rise….but will they? Higher rates usually correlate with higher inflation, a variable smaller companies need as usually they don’t have pricing power.

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