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Rooting for the Stocks We Don’t Own

Fewer stocks are pushing the market higher

Most of the stocks we own in portfolios happen to be larger companies. This is not a criterion for investment at Dock Street, but it is the result of 1) holding great businesses for many years as they get bigger, and 2) finding more of the financial advantages we value in larger companies.

In the last few months (and years) that has paid off handsomely, but we would rather see more stocks doing well, especially smaller companies.

The chart below illustrates what’s been happening since March—large company stocks continue to drive up the S&P 500, while smaller companies have fallen behind. 

         S&P 500 vs Russell 2000  —  Large Companies vs Small Companies

       March 15, 2021 through September 1, 2021

The differences aren’t trivial. Since March 15th the S&P is up over 14%, while the Russell 2000 (smaller companies) has fallen more than 2% in price. In short, fewer stocks are participating in the gains measured by the major indexes, a process (if it goes long enough) that can often precede a major drop in the stock market. 

What could be happening? As bull markets age investors tend to sell smaller, riskier stocks first and hang on to the larger companies that are perceived to be less risky. The major indexes can continue to rise on the strength of the biggest stocks, masking the weakness underneath. 

We’d like to see more stocks, particularly the smaller ones, join the move upward in price. That would suggest a continuation of the bull market. Join us in rooting for the stocks we don’t own.

Best regards,

Daniel A. Ogden


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