Small Caps Likely To Maintain Leadership During This Stage of the Cycle

You have to go all the way back to 1947 to find a bull market rally that made it through one year but did not last a second. And historically, the average stock market gain in the 2nd year has been +12.2%, a bullish omen for 2010.

So the prospects for stocks in 2010 are favorable because it's still early in the recovery phase. Moreover, either the small-cap growth or small-cap value sectors have shown the best 1-year performance in all but 1 of the past 10 stock and economic recoveries dating back to September 1953.

Of the 2 small capitalization categories, small growth led in 7 of these 10 recoveries and small value in 2. Only once, during the 1953–54 recovery, did a large capitalization category lead.

Consistent with this record, small value has led in the present recovery so far, and by a wide margin, too.

Now that the economic recovery has gained some momentum, investors, quite naturally, have begun to ask whether recent leadership by small capitalization value stocks will persist.

If history is any guide, the answer is "Yes."

The averages show clearly that small growth leads out of recessions, with a 1-year average return of +48.2% for all 10 cycles, excluding the present, incomplete one. Small value comes in second, with an average 1-year return of +43.3%.

Chart Courtesy of www.StockCharts.com