S&P Issues Small-Cap Caution for 2004

December 5, 2003 (PLANSPONSOR.com) - Small-cap mutual funds continued to outpace their mid- and large-cap equity counterparts in November, but investors may be disappointed by the segment's performance next year, according to a new analysis.

According to Standard & Poor’s, small-caps took the cake last month turning in an 3.32% gain versus a return of .88% for the broader S&P 500 as of November 28.  Mid-cap and large-cap funds both remained in positive territory for the month, turning in performances of 2.57% and 1.40%, respectively.

However, it isn’t clear how long the small-cap fireworks will last, Standard & Poor’s warned equity investors. “Standard & Poor’s is cautious about the outlook for small-cap stocks since they tend to underperform large-cap stocks in the second year of a bull market,” explained Sam Stovall, Standard & Poor’s Chief Investment Strategist, in a statement.  “While we expect that small-cap stocks will continue to show sizable earnings gains, Standard & Poor’s also feels that valuations are strong for small-cap stocks and that could hold them back.”

Looking at equities as a whole, S&P said domestic equity gains softened a bit in November. The average domestic equity fund registered a return of 1.85% for the month, noticeably lower than the 6.62% return registered for the month of October.  “Investors were nervous in November,” Stovall said.  “Investor optimism seemed to be dampened by profit taking, questions about the economic recovery, and terrorism alerts. We do, however, expect these concerns to be short lived.”

Overall S&P’s database of over 15,000 domestic mutual funds showed that the average equity fund is up 28.7% this year through November. 

For 2004, Stovall forecasts a 10% gain for the S&P 500 to 1190 by year-end. He points out that in their first years, bull markets tend to recoup 89%, on average, of the prior bear market’s losses.  According to Standard & Poor’s data, this year’s market has recouped 35% of the previous bear market’s declines. Stovall also suggested that the outsized gains of the 1990s bull market, however, may limit returns for the current bull market.

Average returns by investment style for November and year to date (through November 28) according to S&P included:

  • Large-Cap Growth – .96%, (24.64%) 
  • Large-Cap Value – 1.39%, (21.80%) 
  • Large-Cap Blend – 1.08%, (21.86%) 
  • Mid-Cap Growth – 2.34%, (34.66%) 
  • Mid-Cap Value – 2.66%, (29.91%) 
  • Mid-Cap Blend- 2.71%, (33.35%) 
  • Small-Cap Growth – 2.99%, (43.20%) 
  • Small-Cap Value – 3.59%, (37.24%) 
  • Small-Cap Blend – 3.38%, (41.23%) 
  • Domestic Equity Funds – 1.85%, (28.73%) 
  • S&P 500 – .88%, (22.26%).