Risk continues to pay off in 2006 in the U.S. stock market. Exhibit A is slicing equities by market cap and comparing year-to-date performance through February 17. By that tactic, small cap is well ahead of mid cap, which in turn is comfortably beating large cap, as the chart below reveals. We expect no less over the long haul, and for the moment, the hierarchy is intact for 2006 thus far. (All charts below use data from
Further refining of equity market cap by style also shows a penchant this year for rewarding both smaller stocks and those with a value tilt. Value in fact has been on a roll for several years, trouncing growth in no uncertain terms in the 21st century. There’s been talk that growth is due for a rebound, but judging by the year-to-date numbers, the evidence of growth’s revival still looks premature, as the following chart details.
Moving to a sector analysis of equities, the taste for risk remains largely intact, or so one could argue. Consider that in the large cap space, as defined by the S&P 500, telecom stocks are not just leading, they’re flying. Even the recently red-hot energy sector is having a tough time keeping up with telecom this year. Telecom, of course, has long since shed its aura of Ma Bell stability, and by most accounts is now a volatile sector with about as much visibility in any given company as a gray ship in heavy fog. As such, the embrace of telecom this year suggests something other than running for cover as the strategy of preference.
Over in midcaps, risk is arguably in favor as well. Telecom stocks aren’t first in this slice of equities, but they’re a comfortable third, and doing quite nicely in the slot. Meanwhile, information technology stocks are the midcap leaders, suggesting that risky business remains alluring in this space as well, albeit with a slightly different strategy.
Things are a bit more complicated in small caps, where the top-performing sector this year through February is materials. We’ll leave it to the analysts to tell us if materials represent something safer than telecom and tech these days. In the meantime, we can say unequivocally that sector rotation in small caps marches to the beat of a different drummer relative to mid and large caps. Significant? Stay tuned….


  1. Max

    Risk should always pay off eventually, right? Otherwise I want to return all my CAPM books. So my question is, why is risk paying off now? Doesn’t energy and telecom seem strange bedfellows? Shouldn’t rising interest rates squash this?

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