Investment Strategies
Time To Switch To Large Caps, Says Harris Private Bank's Jack Ablin

Small caps have become relatively expensive and large caps will “dominate the capitalization race over the coming quarters,” says Harris Private Bank's chief investment officer, Jack Ablin, in his latest market outlook.
Since the revival of risk appetite last October small-cap stocks have rallied some 25 per cent, and these stocks as measured by the Russell 2000 index have outpaced both the S&P 500 and the MSCI Emerging Markets indexes in the interim, the report says.
However, demand for these riskier stocks appears now to be waning, says Ablin, as they are struggling to attract new buyers. He cites research from EPFR Global which finds investors pulled money out of small caps in 37 of the last 40 weeks stretching back to last May.
Given these facts, Ablin believes momentum for the small-cap sector is fading, and says this is backed up by the 4 per cent rise in the S&P over the last four weeks while small caps declined. Looking back further, he says small caps have outpaced the S&P 500 for about 11 years, clocking up a 100 per cent gain in the period. “That’s a long stretch considering that large caps and small caps usually switch leadership every five-seven years,” Ablin writes, partly explained by the fact that large caps, as measured by the S&P, were “wildy” overvalued at the beginning of the period.
Meanwhile, the S&P 500's earnings has reached its highest level since June 2008, according to the outlook.
In other comments, the movements of crude oil are a by-product of the Federal Reserve's program of asset inflation, says Ablin, something that is likely to result in higher inflation levels as we move into the later stages of the recovery. This could be construed as another argument for large caps, as companies that have the ability to set prices to keep up with inflation may be more prevalent in the large-cap space.
"If oil prices were responding to a heightened geopolitical threat as many are speculating, then it would seem that the price of Treasuries would rally in sympathy, yet they have been falling in the face of rising crude," says Ablin, chief investment officer at the private bank. "More likely, crude is rallying on the prospect of a debased dollar, and looking through this lens supports the 'reflation' argument.”
Among positive signals from the economy is the fact that households have been paying down their debts consistently for the past 13 quarters and “the worst excesses” are now written off, according to Ablin. While this spells good news eventually for disposable income, wages will also eventually rise, and together these factors will quicken the pace of inflation, Harris Private Bank's outlook says.
On the downside, “Washington is busy rolling out the red tape to punish the private sector for the bubble years,” says Ablin – something that bodes ill for the national return on capital, of which the regulatory environment is a key determinant.