The Small cap stocks have given an average annual compound return of 29.9%. Between 1961 and 1968, it was a yield of 24.7%, and between 1975 and 1986, an average annual return of 27.8%. Gerald Perritt believes that since 1926 the cycles of high performance small cap lasted between 5 and 11 years, so an average cycle of 8.3 years. These titles are also used to initiate such cycles ancestors when their price / earnings ratio is equal to the average of large cap stocks, and get worse results when this ratio is twice as large as that of large compagnies57. Investors should therefore expect that small firms through cycles less fortunate, in which it is better to invest in bonds and large cap stocks.


The cyclical nature of the securities of small and large cap has been widely documented by the scientific community, including teachers Kleidon, Marsh and Brown, 198358. Returning to the database Reinganum on New York stock exchanges (NYSE) and American (AMEX), they found that between 1967 and 1979, a period of about five years have emerged in which the highest yields were sometimes made ​​by small caps sometimes by large caps (for example, between 1969 and 1974). This discovery has important implications for future research, since we realized the importance of studying market data for several decades to understand the phenomenon of small cap.

Professor Marc Reinganum, a leading Chicago Boys to be interested in the phenomenon of small caps, signed in 1992 an article in which he defended the idea that small-cap returns do not necessarily follow a random walk but they follow a fairly predictable cycle. Based on market data for the period from 1926 to 1989, Reinganum noticed that it is possible to predict the yield difference between small and large caps, including taking a scale of five years. In other words, a period of five years in favor of large cap stocks and those unfavorable to small cap is followed by a period of five years where the trend is the opposite. The results of the investigation are all the more convincing it analyzes the relationship between corporate Flex Cap during a period of more than 50 ans59 (1926-1981).

The phenomenon is similar to the win-lose effect highlighted by DeBondt and Thaler, who is that yesterday’s losers are tomorrow’s winners, and vice versa60. It would also be consistent with the general comments of Professors Fama and French Chicago on the negative autocorrelation of stock prices in the long term, ie the tendency of securities to higher returns to experience in a subsequent period and for several years of below average returns, and vice versa61.

For those who like statistics for a long history, I have reproduced in the following table revealing figures on the returns of small cap compared to those of large cap stocks, since the 1920s to today . The 1940s, 1960s and 1970s were in favor of the values ​​of small companies, while the 1920 and 1990 decades have favored stocks of large companies.

Real business cycle or predictions which come true?

The question I ask myself about the stock market cycles is: Such cycles are they based on real fundamentals (cycles of production, consumption, savings, investment, inflation, stock rotation , etc..) or is it Ides of induced beliefs (true or false), habits and movements of fashion?

Stock markets are trying to provide in a crystal ball, I would say, the movements of the economy, trends in specific industry and good business opportunities represented by a particular company. The mere fact of an event can predict that the scheduled event arrives. For example, if a majority of people believe that inflation or the price of goods will increase significantly over the next year, this is sufficient to induce them to purchase goods at that time and bring about the inflationary they fear.

The mere belief today that the securities of small and large capitalization follow cycles desynchronized be sufficient to cause such cycles? I think so. At least, this hypothesis must be taken seriously. No doubt that The stock market cycles between large and small enterprises based on economic facts independent of any individual or collective. However, there comes a time when investors, especially professionals, believe so strongly in the presence of cycles they amplify them, and, worse, give birth.

Professional investors and Wall Street Goofs tried, somehow, to streamline their opposites securities of small and large cap. Some thought out that small caps gave their best performance at the beginning of a phase growth or economic recovery. The standard explanation holds two factors. The first is that the securities of small businesses are particularly vulnerable during economic downturns, and when the recovery is felt, they enjoy a spectacular catch in relation to securities of large cap. The second factor is that, when an economic recovery, small businesses react quickly to new needs and new consumer demands. Their sales and profits are growing faster than those of large companies and investors find interest in this asset class.

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