Will large cap stocks lead in 2011?

If history repeats, the answer is yes.  Large caps look poised to outperform...or so says a favorite chart of ours.  The chart - seen below - is a measure of how attractive large capitalization stocks are in relation to small cap stocks, and it has a good record.  The plot below compares the earnings yield on big cap stocks with the median earnings yield for a broad universe of stocks.

On the chart above - looking at the bottom plot - the higher the line moves, the bigger the gap between the earnings yield on large cap stocks versus the earnings yield on the median stock and the more attractive large cap stocks become.  The lower the plot moves, the more attractive small stocks become relative to big stocks.  Normally, this is a pretty dull chart; extremes are rare.  Today is the exception.  Larger stocks appear to be more attractive than at any time since the early 1980s.

We are bullish on the stock market for 2011, and stocks in general should have a good year.  But if history is a guide, large cap stocks should have their day in the sun.

To view today's complete Market Comment, click here.

Mark Dodson, CFA

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