Large-cap stocks have had quite the run recently. Who would have thought the tenth year of the current bull market would bring a 31.49% return for the S&P 500 Index - its strongest yearly performance since 2013? Considering the long-term average length of equity bull markets is a shade over seven years, 2019’s epic performance will likely stand out in investors’ minds for some time.
The fourth quarter was especially strong. Despite stumbling during the first two days of October, the S&P 500 Index reached new highs 22 times during the quarter, including nine records in the final 13 trading days of the year. While small-cap stocks participated in this rally, they still lagged large-caps for all of 2019 with the Russell 2000 Index up +9.94% for the quarter and +25.52% for the year.
While nobody should be complaining about such robust late-cycle returns, the underperformance of small-cap stocks is a bit confusing. Investors were in a risk-on mentality during much of 2019, and typically in this environment, “riskier” assets, including small-cap stocks, are expected to outperform. What is also perplexing is the lack of effect that the ongoing trade-war related headlines had on large cap stocks, since large cap companies tend to be more global in nature compared to the more domestic footprint of small caps’ business models.