Time for Large Caps to Shine, Says Hulbert

With 2009 winding down, MarketWatch’s Mark Hulbert says many signs point toward large-cap stocks being the place to be.

Hulbert says that in general, this time of year is a good time to invest in large caps. “In short,” he explains, “mutual fund managers’ compensation incentives induce them to underweight small-caps as year-end approaches and overweight large-caps.” That process starts well before December, Hulbert says, pointing to this past November as evidence (large caps almost doubled the returns of small caps for the month, he says).

In December, Hulbert says, tax-loss selling also comes into play. And “because small-cap stocks tend to have the lightest trading volumes, their prices tend to be the ones most affected by such selling,” he says.

And there are additional reasons that 2009 in particular should feature a lot of tax-loss selling, Hulbert says. He notes that following big positive years like 2009, tax-loss selling is an even greater factor than it is in down years, when many investors lose money and thus don’t need to offset gains.

Hulbert provides data that backs up his contentions about now being prime time for large caps. He examined stock returns for the month of December and first two weeks of January going back to 1964, and found that “there is a strong inverse correlation between the stock market’s strength over the first 11 months of the year and the small-caps’ relative performance during December and the first half of January.”

“What this means: Because the stock market is coming off such a phenomenal rally — up 21% for the year, and up a phenomenal 65% since the March lows — the odds favor the large caps over the small caps over the next six weeks,” Hulbert concludes.

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