SPY is dominated by mega caps. (See the attached chart). Mega caps have been outperforming. That might not explain everything, but it does explain some of it.
Why are megacaps now dominating? Here is what I wrote in 2012:
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…in the long run (over the next 7 years) large (as a class) will almost certainly do better than small.
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Here we are 7.5 years later and my prediction has come true.
I see the market going in cycles. Mega caps outperformed in the U.S. during the 1960’s, the 1990’s, and the 2010’s. The common denominator is that all three periods were preceded by a long bull market.
Stage 1.
Bear market: Stocks are dumped. Stocks; especially small caps, take huge price hits, sometimes for reasons that have nothing to do with earnings; such as margin calls.
Stage 2.
1.5-3 years. Fundamental investors get to choose between buying fair businesses at great prices or great businesses at fair prices. The long-term investor would prefer great businesses, but in the short term prices for fair companies rebound sharply. That causes small value to outperform.
Stage 3.
People looking at past history stick with small value because of past performance.
Fundamental investors get to choose between fair businesses at fair to good to great prices and great business at good prices.
Stage 4.
The small value juice has been squeezed.
Fundamental investors get to choose between fair businesses at fair prices and great businesses at great prices. This starts a rotation into large growth.
Stage 5.
Momentum is king.
People start jumping off the small value bandwagon. Why own small caps? Past performance shows better returns and lower volatility for mega caps!
Stage 6.
Bubble trouble. As investors become less valuation conscious and more momentum conscious, valuation gets ignored. Nifty-Fifty, Dot-Com, FANG, stocks look like great deals at any price! Until they aren’t.
Stage 7.
Small value stocks do best in the next bear market because they started from depressed prices, had few momentum investors on the bandwagon (who jump abandon ship when prices fall, creating selling pressure) and have little room to fall. If prices were low enough, people will jump back onto the small value bandwagon during the next bull market.
We don’t always get stage 7. But in 2000-2002 as large growth was collapsing, small value was up!
Where are we now? Probably either stage 5 or 6. We will find out.