The past decade has been rough for the stock market as a whole, but small-cap stocks have weathered the storm quite nicely. Small caps have returned an annual average of 8 percent over the past ten years, whereas the S&P 500 has returned less than 1 percent per year. Over the course of the past year, the S&P 600 small-cap index is up about 25 percent, while it's bigger brethren in the S&P 500 has brought back about half that.
But is that kind of performance nearing an end? As Paul Lim reported in his column in the New York Times yesterday, research shows that small caps tend to outperform in the beginnings of a bull market. When the market turns upward, small caps do much better than large-cap stocks in the first 12 months. Over the next year after that, small caps still lead large caps, but by a much smaller margin.
But the longer the bull market stays in business, the more conservative investors start to become. The third year of a market upswing, which is what we're coming up on, is where small-cap rallies sometimes run out of steam. We'll see if that's what in store for this one.