Bull Rally Or Unique Recovery?

April 10, 2012

With the S&P 500’s strong first quarter, the debate is still on as to whether this is a ‘true’ recovery.

The problem is that while stocks have rallied, most of the action is due to large-caps. This calls into question what people mean when they argue that despite last week’s disappointing jobs report, the rally we’ve seen this year isn’t over.

Is a rally not really a recovery? A quick look at some select ETFs is worthwhile to understand what’s going on and what’s not going on.

Below, we have the major U.S.-focused equities ETFs offered by Vanguard that focus on different-sized companies.



My sense is that though some may like to proclaim this to be another bull market, the data tell quite a different story.

Typically in a bull market, we’d expect to see small-cap equities outperforming their large-cap counterparts. But in the current environment, the opposite rings true.

Funds like the Vanguard Mid-Cap ETF (NYSEArca: VO) and the Vanguard Small Cap ETF (NYSEArca: VB) are lagging behind their large- and mega-cap peers, despite their higher beta to the broad market.

Over the past year, VO and VB have returned 1.22 and -0.75 percent, respectively. Meanwhile, the Vanguard Mega Cap 300 Index ETF (NYSEArca: MGC) and the Vanguard Large Cap ETF (NYSEArca: VV) have returned 7.88 and 6.7 percent, respectively. So what gives?

It seems what’s really going on is investors have become quite sensitive to where they’re dipping their toes in the market. Rather than taking a deep dive within the broad equity market, they’re staying clear of relatively risky pockets, and instead buying into the large-cap segment.

But really, investors’ preferences for large-caps highlight a unique aspect of this recovery: Large U.S. companies have emerged as more “productive, profitable, and flush with cash.”

As the Wall Street Journal reported, “[d]eep cost cutting during the downturn and caution during the recovery” has made large-cap companies much more efficient.

My only question is, Will we see this recovery continue into higher-beta equities?


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