Rising Interest Rates and Market Cap

The June Money magazine points out small-cap stocks have outperformed large-cap stocks for the last four years. The Russell 2000 has risen 51% over the past 12 months, while the S&P 500 is up only 25%.

The price/earnings (PE) ratio of small-cap stocks is 18.6, while the PE ratio of large-cap stocks is 18.2. This is the first time since 1984 that the average PE ratio of small-caps has been higher than large-cap stocks.

Large-cap stocks tend to perform better in the later stages of an economic recovery, while small-caps tend to do better in the earlier part of an economic recovery. Since 1984, large caps have returned 8% in the second year of a recovery, while small-caps returned 5%.

When short-term interest rates are rising, large-caps have returned 10.3% per year, while small caps only returned 7.7% per year.