When the stock market pulls out of recession, small companies are typically first out of the gate. According to Citi analyst Lori Calvasina, midsize companies have delivered the top gains since the market plunged on November 20 (small caps initially led mid and large caps through the end of 2008, but larger companies have proved more resilient since the beginning of 2009.)
Still, Calvasina makes the case that small companies will overtake large and midsize companies in 2009. What's more, she expects growth companies to outpace value companies within the small and midsize categories. However, the length of the small-cap rally is uncertain:
We do harbor some serious doubts about whether the outperformance trade in small cap will be the start of a new multi-year cycle of small cap outperformance (small cap outperformance ceased in mid 1983), we do expect the beta bounce in small caps to occur during the initial recovery.
The takeaway for investors seems to be that an allocation to small companies in your portfolio is a good idea, but you shouldn't give up balance and diversification in these uncertain times. Stick to your plan, but don't fear the small caps.