Large Caps vs. Small

From Dr. Ed Yardeni blog.  A post looking at valuations by asset size.  Here's his thoughts:

"So far this year, the {Small and Mid-Caps} have been trading around valuation multiples of 17-19, while the S&P 500 has been hovering around 15. That suggests that the bubble this time is in small stocks. Indeed, the forward P/E of the Russell 2000 universe of these stocks, at the end of March, was 24 for the composite, with the growth and value components at 30 and 20, respectively. 

The Russell P/E is significantly higher than the S&P 600’s current reading of about 18 because it includes more stocks of companies that either have no earnings or are losing money. Yet investors are willing to pay high prices for them, expecting that they will eventually have great earnings. These great expectations more often than not end very badly once these companies actually start earning money. When they do so, it becomes obvious how dangerously overvalued these stocks are, especially if growth expectations turn more realistic and less fanciful. 

By the way, while the forward P/E of the S&P 500 was 15.5 during March, the median forward P/E was 16.6. This indicates that the larger-cap stocks are more fairly valued in the S&P 500 than the smaller-cap ones in this universe of LargeCaps. Back during 1999, the reverse was true."

My thoughts:  Stock valuations are elevated and this has likely been a chief reason prices have struggled so far this year.  While the most likely way for stocks to correct these valuations is to decline, it should be noted that stocks can correct by time as well as price.  I mean it's possible that stocks could simply just churn about for awhile.  I'm not saying that's going to occur and I've said in the past both here and here that I think that probability is suggestive of a correction some time in 2014.  But if valuation is a headwind for stocks then we also need to point out that earnings, economic growth that I think may be better than expected going forward and low interest rates have the market's back.  If markets do what they have to do to prove the most amount of investors wrong, then an unlooked for scenario could be that stocks go back and forth for much of this year and do………nothing!  Time will tell.

I will be traveling on Monday.  The next post here will be Tuesday unless there's a need to break in.

*At the time of this post we were long ETFs related to these different asset classes in many client and many {but not all} personal accounts.  

Link:  Dr. Ed's Blog:  "Large Caps are Cheaper than Small Mid-Caps."