By Brian Scheid
When it comes to equities, bigger has been better during the coronavirus pandemic.
Both on the way down from the S&P 500’s record high Feb. 19 and on the way back up from its March 23 trough, larger U.S. stocks have done better than their smaller-cap peers.
On March 23, the S&P 500 settled down 33.9% from its February high, but smaller cap indices fared far worse. The Russell 2000, an index of the smallest two-thirds of stocks in the Russell 3000, fell by 40.8%, while the S&P 600, another small-cap index, fell by 41.4%. By the end of May, the S&P 500, a large-cap index, was down just 10.1% from its all-time high in February, while the S&P 600 was 21% below its peak and the Russell 2000 was still 17.6% lower.
The divergence has been driven by technical factors such as demand for the liquidity offered by the largest equities, as well as more fundamental issues from proficiency in online commerce to scale, diversification, balance sheet strength and access to capital markets as analysts and investors seek to divine which companies can best weather the coronavirus storm and thrive in its aftermath.
“With the larger caps, the view is that they will be able to accelerate growth going forward,” said Peter Cardillo, chief market economist with Spartan Capital Securities. “There is worry that the smaller-cap companies are going to be harder hit once the economy reopens totally.”
In a May 29 research note, equity analysts with Goldman Sachs wrote that the economic collapse caused by the coronavirus as well as a move toward liquidity “prompted investors to embrace large-cap stocks and sell small-cap stocks in an effort to minimize solvency risk in their portfolios.”