Avoiding smaller stocks around recessions may be a big error.
While U.S. small-cap and midcap equities have historically underperformed large caps during recession-linked downturns, the gap pales in comparison with smaller stocks’ superior returns over a full economic cycle, according to a note from JPMorgan Chase & Co. strategists led by Eduardo Lecubarri. They say an economic contraction isn’t imminent, but are encouraging investors to limit risk in case one comes sooner than expected.
During the past five recessions, the Russell 2000’s average loss from peak to trough is 39.2 percent, compared with 34 percent for the S&P 500, according to JPMorgan’s calculations.
However, their performance in the 12 months before the peak and the 12 months after the trough far exceeds that of the big companies. The Russell 2000 beats the S&P 500’s by 18.2 percentage points prior to the apex, and 30.4 percentage points after the nadir.
“Avoiding SMid in hopes of timing a recession is a money-losing strategy,” the strategists wrote. “It is around recessions that one cannot afford to be out of SMid.”
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