Are big companies a good place for investors to hide? That's the impression you get, especially with investors running into the arms of so-called mega-cap stocks now that the global economy is showing clear signs of deterioration.
The Wall Street Journal's MarketBeat has a fascinating story about this trend, and noted through technical research that the outperformance of these megacap stocks can point to trouble ahead.
As a group, the stocks have been outperforming their small and midsize brethren since mid-2011. And the last two times this outperformance occurred – at the end of the dot-com bubble and prior to the financial crisis – the result wasn't pretty for stocks in general. Some observers believe that today's outperformance by megacap stocks is setting the market up for another bout of turbulence.
The S&P 100 has risen 3.7 per cent over the past 12 months, beating the 0.6 per cent gain for the S&P 500 and the 5.6 per cent retreat by the small-cap Russell 2000. But as MarketBeat points out, the outperformance of the megacap S&P 100 index is "recognized more for ending rallies than leading them."
Fair enough. But what's interesting is that these megacap stocks that investors embrace for safety – presumably because of their global footprint, diversified revenues, strong cash positions and generally stronger dividends – provided little safety during the last downturn.
The S&P 100 fell 54.1 per cent from its high in October 2007 to its low in March 2009, after factoring in dividends, which is only a fraction better (0.8 percentage point, to be precise) than the performance of the broader S&P 500 over the same period.
The performance difference with the benchmark small-cap index is more pronounced, but hardly enough to provide much comfort. The Russell 2000 index fell 58.5 per cent during this period, or 4.4 percentage points worse than the S&P 100.