U.S. Narrow Markets: An mpirical Investigation
This paper has documented the recent narrow markets phenomenon in the United States from various perspectives. Over the period 1995?98, large-cap stocks outperformed small-cap stocks by a wide margin in a reversal of the pattern that persisted since the early 1980s. Even though small-cap stocks appeared to be attractive using standard measures of growth and value over the recent time period, large-cap stocks turned in superior fundamental as well as return performance. The outperformance of large-cap stocks appeared to be driven by returns to common factors, such as size, rather than stock-specific events. Active managers who had the right foresight in this respect may have been reluctant to make the required common factor bets because of their aversion to making such bets. Finally, this study raises a number of interesting issues for portfolio management such as the performance of concentrated versus diversified portfolios in narrow markets, the re-appearance of the S&P 500 index effect and the possibility of creating a new asset class of global companies that would comprise the largest multinationals from various indices such as the S&P 500 and EAFE.