Small- and mid-cap stocks (SMID), despite bursts of outperformance, have underperformed large-caps year to date - as they have over the past five years. But they may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues in China, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps. SMID stocks can be risky, but despite those risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 20% of the U.S. stock market's capitalization is comprised of SMID stocks.

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With Labor Day weekend now behind us, insider sentiment, as expressed by data from Vickers Stock Research, doesn't suggest a broad mover higher for stocks, nor does it suggest a big move lower. Compared to the prior week, Vickers' sell/buy ratios have remained largely stable, with the Total One-Week Sell/Buy Ratio rising slightly to 4.22 from 4.05, while the Total Eight-Week Sell/Buy Ratio has fallen slightly to 4.52 from 4.75. Meanwhile, Vickers' Insider Index is now at -19.57 compared to last week's -19.49, but is improved from the annual low of -20.98 set in early August. Surrounded by an environment of swirling geopolitical issues, 'pending' interest-rate cuts, and a contentious presidential election ahead, it is hard to blame any investor, insider or not, for thinking a seat on the sidelines may be reasonable right now. On a sector basis, insider buying outpaced selling in the Energy sector last week by a factor of 9.5-times. On the flipside, selling by insiders last week was greatest in Financials, with shares valued at $366 million sold versus just $4 million bought. Selling was also of note in Consumer Discretionary, Healthcare, Information Technology, Industrials, and Consumer Staples. This week, analysts at Vickers highlighted insider transactions of interest at Bank of America Corp. (BAC) and Foot Locker Inc. (FL).

Small- and mid-cap stocks (SMID) have outperformed large-caps over the past month. With the Russell 2000 advancing 10% while the S&P 500 has been stuck in neutral, SMID stocks may be in a better position to generate market-beating returns going forward. For one thing, these companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from unrest in the Middle East, the Russian invasion of Ukraine, China issues, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 Small-Cap Index at 13 compared to a trailing P/E of 25 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. From 2003-2021, the Russell 2000 climbed 450%, compared to an advance of 330% for the S&P 500. But SMID stocks can be risky. The standard deviation for monthly returns was 5.7% for SMID stocks over our 2003-2021 test period, versus 4.3% for large-caps. SMID stocks fell further in negative years during our test period, with an average 15% drop versus a 12% pullback for large-caps. Conversely, when SMID stocks rise, they tend to rise sharply. The average annual gain in positive years was 19% for SMID stocks, versus 17% for large-caps. Still, despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 20% of the U.S. stock market's capitalization is comprised of SMID stocks. For a list of some of our favorite small- and mid-cap stocks, see our Mid-Cap theme model portfolio.