For the past 7 years, Large Caps underperformed Small Caps and it’s only recently that the Blue Chips have started to gain ground. Investment manager after investment manager not wedded solely to Small Caps have been saying this would happen. Unfortunately, they’ve been saying it for most of the 7 years that they have been grossly wrong. They get no credit with me for being right in the short term and I have been dubious that Large Cap outperformance is a sustainable long term strategy.

I keep hearing about how Large Cap fundamental valuations are so reasonable and so much cheaper than the market and especially Small Caps. That is undeniably true. I have also heard that the majority of Large Caps pay dividends while most Small Caps do not. I agree with that - just click here for the proof. I have also heard how the low dollar is disproportionately beneficial to the Large Caps / Multinationals who have significant operations outside the United States. I agree that the Large Cap operations benefit more than Small Caps from currency issues. However, I see no evidence that it has helped their stocks more than it has helped / hurt / or been neutral for Small Caps. Just run the charts of Russell 2000 and Russell 1000 vs the US Dollar Index - hopefully you’ll see my point.

But all that talk about being cheaper, paying better dividends and being advantaged by the weak dollar is a minor point. According to the advocates for Large Caps, the biggest advantage is that they are much “safer” than Small Caps. First off - there is no such thing as a “safe” or “safer” stock. All stocks are risky - it’s only your individual tolerance for risk that matters.

How many times have you heard that the Large Caps have less volatility, lower betas, etc. etc.? To me that implies that when there is trouble in the market that Large Caps will hold up better. So on a day like today where there was a touch of panic, this theory was being tested. AND IT FAILED MISERABLY. The Russell 2000 went down 1.36% today vs. 2.96% for the S&P 500. Meanwhile, the Russell 1000 declined 2.88% which was almost perfectly in line with the market. Similarly, the S&P 100 declined 3.17% vs. 1.38% for the S&P Small Cap Index. And if you don’t like percentage price changes, just compare the volume of shares traded in the Dow stocks versus their 90-day Average Volume. 20-50% more volume today than normal is not calm. Citigroup had over 100% more volume but who’s counting?

Large Caps have fundamentally cheaper valuations, are more likely to pay dividends and their operations benefit more from a weak dollar. That I agree with. As for evidence that their stocks will perform better in turbulent times - that did not happen today. Maybe it will over time, maybe it will not… but just because Large Cap investors and fund managers want it to happen does not mean it is true.