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The Small-Cap Premium Still Lives on the Value Side

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Historically, small-cap stocks have outperformed large-cap stocks. This difference is referred to in investment circles as the small-cap (aka small-company) premium. The discovery of the small-cap premium is credited to Rolf Banz’s 1981 Journal of Financial Economics study, “The Relationship Between Return and Market Value of Common Stocks.” I specifically bring Banz’s study up because there has been a debate as to whether the publication of his study effectively destroyed the premium.

Between 1927 and 1980, small-company stocks realized an annualized return of 17.1%. Over the same time period, large-company stocks gained 9.3% annually. Using the formula of small minus big results in a rounded premium of 7.7%. (I’m using data from Dartmouth professor Kenneth French’s website for the smallest and biggest 30% of companies to calculate the returns.)

During the subsequent period 1981-2016, small-company stocks realized an annualized return of 11.8% and large-company stocks have realized an annualized return of 11.7%. This is the argument for Banz’s study having ended the premium. These numbers do not tell the full story, however. Further analysis reveals a different picture. Continue Reading »

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 Highlights from this month’s AAII Journal


AAII Sentiment Survey

Pessimism bounced back after two weeks of declining. At the same time, neutral and bullish sentiment declined compared to last week. More about this week’s results.

This week’s results:
  • Bullish: 30.2%, down 5.1 points
  • Neutral: 32.4%, down 1.8 points
  • Bearish: 37.4%, up 6.9 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

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The Week Ahead

Six members of the S&P 500 are scheduled to report: Acuity Brands (AYI) on Tuesday; Bed Bath & Beyond (BBBY), Monsanto (MON) and Walgreens Boots Alliance (WBA) on Wednesday; and CarMax (KMX) and Constellation Brands (STZ) on Thursday.

The week’s first economic reports will be the March PMI manufacturing index, the March ISM manufacturing index and February construction spending, which will be released on Monday. Tuesday will feature February international trade and February factory orders. The March ADP Employment Report, the March ISM non-manufacturing index and the minutes from the March Federal Open Market Committee meeting will be released on Wednesday. Friday will feature the March jobs report, including the change in nonfarm payrolls and the unemployment rate.

Richmond Federal Reserve bank president Jeffrey Lacker will made a public appearance on Monday.


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