It Could Pay to Be Mindful of Mid Caps

Even with recent signs of life, it cannot be ignored that the S&P 500 is down 13.3% year-to-date and came perilously to a bear market last month.

Some broad equity benchmarks are delivering worse performances than that, which is to say advisors and clients alike aren’t too far off-base if they’re feeling as though nothing is working in stocks this year. However, there are glimmers of hope and it can pay to examine what’s performing less poorly than the broader market.

Quiet as it’s been kept and that’s par for this asset class, mid-caps are outperforming large-caps this year. The S&P MidCap 400 Index is beating the large-cap S&P 500 by almost 300 basis points year-to-date. Alright, so that’s not say much, but mid-cap equities are showing relative resiliency and that could be instructive going forward.

Not All That Surprising

Mid-cap stocks are often overlooked, but the group has an enviable track record – one worth highlighting – in tough market environments so it may not be surprising the group is less bad this year than large-cap rivals.

A new report by State Street Global Advisors (SSGA) analyzes the performance of mid-cap equities during the three major systemic risk events spanning the 1994 through 2020 period. Those being the Asian currency/Russian financial crisis, the bursting of the dot-com bubble and the global financial crisis.

Advisors should impart upon clients that smaller doesn't mean the elevated levels of volatility that usually accompany small caps. Actually, the drawdowns of mid caps during the three aforementioned systemic events were surprisingly less severe than other market segments.

“The S&P MidCap 400® is an often-overlooked member of the S&P Composite 1500® series, despite outperforming the S&P 500® and S&P SmallCap 600® since 1994,” according to S&P Dow Jones Indices. “The mid-cap U.S. equity index also weathered the market volatility slightly better during the first five months of 2022 by falling less than 11%, compared to a near 13% decline for the S&P 500 and more than 11% for the S&P SmallCap 600.”

It’s hard to ignore long-term performance like that, but for whatever reason, money managers consistently direct more capital to large- and small-cap equities than they do to mid-cap stocks.

Another Important Comparison

Advisors should note the aforementioned S&P MidCap 400 Index has a rival in the form of Russell Midcap Index. However, these benchmarks are far from carbon copies of each other and long-term performance confirms as much.

Since 1994, the S&P index beat its Russell rival by 1.9% through the end of May. Much of that out-performance is attributable to sector exposures and market capitalization. Regarding the latter point, the average market capitalization of components in the Russell 1000 Index is larger than that of the competing S&P benchmark, meaning the S&P 400 has more of the size factor on its side.

“The results show that the choice of constituents (selection effect) drove the S&P 400’s outperformance during the first five months of 2022, particularly in the Information Technology, Financials and Health Care sectors,” says S&P.

The Point: It’d be easy to gloss over smaller stocks today, but mid-cap names have history on their side and are worth monitoring should stocks rebound.

Related: Commodities Still Proving Inflation Hedge Mettle