Playing Small Ball in Bear Markets

When bear markets finally start to recede and bull markets re-emerge, the smaller the stock, the better. The unsettled economic landscape suggests that the market may continue to meander for some time before rebounding, but when it does, small-cap stocks are likely to lead the way, according to Merrill Lynch.
The current bear has lasted now for a full year, about the average duration for bear markets going back to 1926, according to Merrill. But it’s also been one of the worst, with large-cap stocks falling 40%, the fourth-largest decline in large-cap shares (trailing bear markets beginning in 1930, 1937 and 1999). Small-caps have lost 37%, more than the average 34% decline.
“When the Bear finally heads for hibernation, we see that the smaller the stocks the better the performance,” writes Steven DeSanctis, small-cap strategist at Merrill.
... he points out that the Russell 2000’s forward price-to-earnings ratio currently stands at 10.3, lower than the previous bear-market average of 12.5. The problem for small-caps would seem to be funding — high-yield spreads remain elevated, and smaller companies in need of funds tend to borrow at higher rates.
“We are in uncharted territories,” he writes. “We need to see the spread narrow consistently over the next several months before we get comfortable with small caps.”

από τη γνωστή στήλη της wsj