Bigger is Still Better
Igor Manukhov - Aug 29, 2023
Larger companies continue to outperform smaller ones. It makes sense to stay overweight them.
As the markets continue to recover this year we engage in an ongoing process to seek out the best investments within our universe. One popular trade during a recovery phase is to buy smaller market cap companies. As the theory goes, smaller companies tend to grow faster and can return more to shareholders. Interestingly, this is not always the case when it comes to the stock market. The charts below compare the performance of large cap indices to their small cap equivalents. The black line represents the relative strength of large Canadian stocks to smaller ones, while the red line represents the relative strength of large US stocks to smaller ones. When those lines rise, larger companies tend to outperform smaller ones and vice versa.
As you can see, on both sides of the border it still makes sense to stick with the big names as they continue to outperform in this market cycle. Albeit, outperformance is more pronounced is the US relative to Canada. The ability to visually recognize a trend and its’ potential change in real time is one of the major reasons I use chart analysis in my work. I don’t have to form a strong opinion, I can just simply look at what is happening and adjust portfolios accordingly. For now I recommend to stick with large companies, however monitor the market for a possible emergence of strength in smaller names.
