The S&P 500, whose median company has a market capitalization (share price times shares outstanding) of more than $31 billion, has returned an annualized 13.6% over the past five years. That trounces the 9.7% return of the S&P Mid-Cap 400 (median market cap: $5.6 billion) and the 7.7% return in the S&P Small-Cap 600 (median market cap: $1.5 billion).
So-called large-caps have a lot going for them. These are the stocks that make up the most popular index funds and the household names on the lips of amateur traders and investment analysts alike.
It makes sense, then, that many investors have a huge chunk of their portfolio in large-caps. But it may make sense to branch out to smaller stocks, too, experts say.
That’s because small- and midsize-company stocks have two important factors working in their favor. For one, because investors have been so busy bidding up the price of the market’s biggest stocks, the smaller ones can currently be purchased at a relative bargain.
What’s more, over the course of market history, smaller names have tended to outperform larger stocks over long periods.
Add it all up, and “there’s no question it’s a fantastic time to be diversifying into small- and mid-caps right now,” says Greg Marcus, managing director at UBS Private Wealth Management.
Why it’s worth buying smaller stocks now
When financial pros refer to investments being “cheap” or “bargain-priced,” they’re typically referring to valuation — what an asset is being traded for compared with its estimated worth.
One common valuation metric for stock is the price-to-earnings ratio, found by diving a company’s share price by its earnings per share. The higher the ratio, the more investors are paying for a smaller chunk of a company’s earnings. By comparing a stock’s P/E ratio with what it’s been historically, or the ratios of peer companies, analysts can determine whether a company looks over- or undervalued.
Stocks in S&P small- and mid-cap indexes both currently trade at about 14 times estimated earnings for 2024, compared with a ratio of about 20 for the S&P 500. That means small- and mid-caps trade at a roughly 30% discount to large-caps.
What’s more, small and medium stocks are looking cheap relative to their history. Midsize stocks are trading at a 14% discount relative to their average P/E dating back to 2005, according to data provided to CNBC Make It by CFRA chief investment strategist Sam Stovall. Small-company stocks are trading at a 19% discount to their historical average.
For smaller stocks, that spells “relative attractiveness” versus large-caps, says Stovall. “It either means that large-caps are grossly overbought or small-caps are grossly oversold, or a combination of the two. Mid-caps are not very far behind small-caps.”
In other words, either large-company stocks are currently overpriced, or smaller ones are underpriced. By buying now, you theoretically reap the rewards in your portfolio if and when valuations revert to their historical means.
Why it’s worth diversifying over the long term
Many financial planners recommend parking the bulk of your investments in a diversified, large-company U.S. stock mutual fund or exchange-traded fund. But if you’re hoping to participate in decades worth of stock-market gains, it may be worth investing in funds that own small- and mid-cap stocks, too.
“You want partake in the success of the U.S. economy,” says Jeremy Straub, founder and CEO of financial advisory Coastal Wealth. “That means businesses that are in the U.S. at all parts of that businesses lifecycle — when they’re starting out as a smaller size company, up to the big behemoths that we know as household names.”
Ideally, an investment in a smaller stock pays off when that firm grows first into a mid-size company and then into a market-leading multinational, its share price steadily climbing along the way.
Naturally, many small- and medium-size firms don’t make it all the way to the top. But small- and mid-cap stocks have rewarded investors seeking that kind of growth by beating the S&P 500 over long periods.
In an analysis of foreign and U.S. investments from December 1998 through June 2023, researchers at index provider MSCI found that small-cap stocks outperformed large firms over 15-year periods about 9 in 10 times. From November 1991 through September 2023, mid-caps outperformed both large- and small-caps, according to data from Invesco.
However, the latter analysis also noted that smaller-company stocks tend to come with more volatility, as they tend to be more sensitive to swings in the economy. That means it makes sense to keep most of your portfolio in larger stocks, which tend to offer more stability.
Still, you’d be wise to have some sort of mix, says Straub, which will come in handy when different types of companies go in and out of investors’ favor in the short term.
“The reason you buy large and small companies, is you don’t know which ones are going to perform when,” he says. “Sometimes one or the other will be over- or undervalued. Having investments in each gives you exposure when that asset does well, and you make money.”
If you’re curious about the effect adding smaller-company stocks may have on your investments, check with your financial advisor to see what might make sense for your portfolio.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
