There are signs that money may be shifting into large caps. Ford (F), of course, is the most striking example, but after a decade of dormancy large technology stocks like EMC may also be moving. Possible reasons:
1. Small caps have led since 2003 while large caps have largely disappointed, but nothing on Wall Street lasts forever, and it may finally be large caps’ turn to shine, particularly since so many investors have given up on them. During the past bull market cycle, Wall Street rolled out multiple small-to-medium-size stock funds but I am not aware of any new large cap stock funds; and anywhere I look, people are trading small caps, and the Internet is brimming with penny stock trading ads promising instant fortunes – all a strong contrarian indicator.
2. Small caps generally do better under the Republicans when lower taxes and less regulation encourage innovation and risk taking in small unproven ventures. Large caps do better under the Dems as they can better weather increased taxes and regulation. Larger companies also stand to pick up incremental new business from struggling small caps.
3. There are growing signs that tech spending is on the rise. Again, under the Republicans, companies can grow sales and earnings the easy way – by expanding markets and raising prices – so old-line “dirty” industries, like oil, steel, and fertilizers, shine. Under the Dems, companies have to grow profits by cutting payroll and improving efficiency. The persistently high unemployment certainly accounts for the former, while efficiency is usually improved through technology upgrades. Technology is cyclical, and while companies did fine with what they had for the past 5-10 years, their present systems may have become obsolete and in need of replacement. Many tech vendors are large caps.
4. Plenty of stocks are extended from March of last year (some in total disconnect with their fundamentals that still lag) but I also see a lot of mid-to-large caps forming powerful first bases and ready to take off.
5. It does not mean that from now on every large cap will go up and every small cap will languish. There will still be new disruptive technologies introduced by new small entrepreneurial companies, as well as mismanaged behemoths going nowhere, but the volume in many smaller lower priced caps has been drying up – sure evidence that institutions are deploying money elsewhere. Without liquidity and institutional sponsorship, even the best small caps can languish for years.
A similar situation occurred in the 90s when many large caps that had shone early on, like WalMart (WMT) and Home Depot (HD), spent the better part of the decade (1993 – 1997) going nowhere, thoroughly disappointing investors, but then took off in 1997, producing huge gains for investors in the 1997-99 bull market run. Today many former mega-cap leaders like CISCO (CSCO) or EMC have been dormant for a decade. We’ll see…