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History of the Small, Mid, and Large Caps

Mega-cap is generally defined as stocks with a market cap of $200 billion and larger. Big or Large Cap is $10 billion and larger, Mid Cap is $2 billion to $10 billion, Small Cap is $300 million to $2 billion, Micro Cap is $50 million to $300 million, and Nano Cap is under $50 million. The definition of the above categories has increased over time as the respective market indexes have increased in value.

Large-cap stocks are considered stable, older, and blue-chip companies that dominate their industry. Small-cap stocks are considered riskier, younger, high growth, but also a higher risk of failure. US small-cap stocks have historically outperformed their counterparts, US large-cap stocks, under two scenarios. First, during periods of rising US interest rate environment. Rising US yields typically occur during the start of an economic expansion or when the economy begins to recover. Second, when the Federal Reserve (FED) signals that they will no longer cut rates to stimulate the economy.

Many contrarian investors also favor small-cap over large-cap stocks when the broad market suffered a bear market decline or a deep correction. Since small-cap stocks tend to be illiquid and lower quality names, they tend to decline more from their respective highs are the first to washed-out into a broad market sell-off. It is a great time to buy the small-cap market. When investor sentiments begin to improve, many of the mid-cap, small-cap, and micro-cap stocks stabilize and appreciate much faster than the large-cap names.

So, which performed better on a longer-term basis, large-cap or small-cap stocks?

A long-term study of the Wilshire Large-cap/Small-cap ratio (currently at 0.888) depicts the relative performance between large-caps and small-caps. When the ratio rises, the large-cap stocks tend to outperform the small-cap stocks. And when it falls, small-cap stocks outperform large-cap stocks.

The ratio peaked at 1.378 in Mar 1999, just ahead of the Tech/Telecom mania, and promptly fell for the next few years. The ratio finally bottomed at 0.623 in Mar 2014. From the low, the ratio has been progressing higher. A large saucer bottom or cup and handle pattern soon developed. A technical breakout above 0.747 in Dec 2018 confirmed the start of the large-cap outperformance cycle. The ratio quickly climbed to a high of 0.939 in Apr 2020. Since then, the large-cap over small-cap outperformance cycle reversed direction as the ratio has declined. The pertinent question is this temporary (profit-taking/correction), or is this the start of a directional change in trend in favor of small-cap stocks once again?

Another historical study shows the returns of the various Wilshire markets based on market-capitalization dating back to July 1978. Surprisingly, the study shows the Wilshire 5000 total market index as the best performer. The Mid-caps and Small-caps have also outperformed the Large-caps and Micro-caps, over the same timeframe. The historical returns of the various Wilshire markets as of 10/29/20 are as follows:

The Wilshire 5000 Total Market Index (yellow chart – 165.70) is one of the broadest of all major US stock market indexes. It has generated an astonishing 16,470% gain so far.

Wilshire Mid-cap (black chart – 147,997.35) includes the Wilshire 5000 stocks ranked from 500 to 1,000 as measured by market cap has gained 14,699.74%.

Wilshire Small-cap (green chart – 123,773.61) includes the components between 750 and 2,500 by market-cap has returned 12,277.36%.

Wilshire Large-cap (black chart – 111,479.86) includes the top 750 ranked components of the Wilshire 5000 index measured by market capitalization has recorded 11,047.99%.

Wilshire Micro-cap (pink chart – 70,370.23) includes the components ranked below 2,500 measured by market-cap has lagged its Wilshire peers with gains of 6,937.02%.

Source: Courtesy of and FRED, Federal Reserve Bank of St. Louis

Source: Courtesy of and FRED, Federal Reserve Bank of St. Louis

Source: Courtesy of

Source: Courtesy of

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