Back in December of 2008, I wrote a paper titled, “Investing for the Rebound.” The paper is scheduled to be published by the Journal of Financial Planning, sometime this summer. Unfortunately, for most readers, it will be too late by then.
One of the key points of the paper is that following every major market crash (defined as a 12 month period with losses in the S&P 500 Index of 30% or more) small cap stocks1 lead the recovery by a substantial margin. In all of the periods observed, small cap stocks had recovered the losses of the S&P 500 within three years of the market bottom. Some of the missing data points in the paper were the Non-US developed markets and emerging markets. The recovery from this crash gives us an opportunity to see how those asset classes respond.
As of today, the bottom of this major market crash was March 8th, 2009. The chart below shows the Quarter to Date and Year to Date returns, as of May 29th, 2009, for a select group of Dimensional Fund Advisors (DFA) mutual funds. As I have indicated in other posts, I believe that the DFA funds are the best, real life, representation of the major equity assets classes as defined by the Fama-French research. In looking at past performance it is telling us what has happened; past performance is no indication of future returns. What past performance does allow us to do is test academic theories and principles.
As you can see from the chart, smaller stocks, around the globe, are having better returns than the large cap stocks. Granted, this is an extremely short period of time. Additionally, we do not know if we are actually in the recovery or not. However, these results are consistent with the historical observations and what is expected based on the academic theories.
1 Small Cap Stocks are defined by the Fama-French Three Factor Model. It is the bottom 9th and 10th deciles of the market based on each company’s market capitalization. The Russell 2000 does not meet our standards of a true small cap definition. The Russell 2000 is the smallest 2,000 out of the largest 3,000 U.S. companies.
Comments