How Do Mid-Caps Perform During Bull Markets?

The mid-cap market segment comprises companies in the middle of the business cycle. These companies have moved beyond the survival risks that plague early-stage companies. Typically, companies in this group have market capitalizations ranging from $2 billion to $10 billion. For many investors, mid-cap stocks are in the sweet spot of the market because they have significant room to grow while also carrying an acceptable level of risk.

Over the past 20 years, mid-caps have consistently outperformed their large-cap counterparts, as shown in the chart below. In this article, we will focus on the performance of mid-cap stocks during notable periods over the past 20 years when the markets were rising and why this relatively under-followed group deserves a spot in nearly any portfolio.

Mid-Cap Performance and Overall Market Interest

Historically, mid-cap companies have posted strong performance relative to their more popular large-cap counterparts. According to research conducted by S&P Dow Jones Indices, mid-cap companies, as measured by the S&P 400 Mid Cap index, outperformed the S&P 500 and S&P 600 between Dec. 30, 1994, and May 31, 2019, at an annualized rate of 2.03%, and 0.92%, respectively.

Despite the strong performance, the mid-cap segment is relatively under-followed by retail and intuitional investors across the different size segments. According to the report, the mid-caps are also underrepresented within the mutual fund universe. Between 2003 and 2018, the mid-cap segment was the only one that noticed a decline in the number of active funds.

Taking a closer look at monthly returns, during months that closed higher than where they opened, mid-caps posted returns of 3.49% compared to 3.17% by the large-caps. The excess return of 0.32% during the up months was much more significant than the excess returns during down markets, which was -0.08%. In other words, prices between large and mid-caps were highly correlated when monthly prices declined, while they outperformed in the months when prices were rising.

July 2002 to July 2007

During the five-year bull run that occurred between July 2002 and July 2007, the S&P 500 posted an annualized return of 15.0% that was fueled by factors such as low interest rates, and a booming housing market. Since 1942, the average bull market period lasted 4.4 years with an average cumulative total return of 154.9%.

Increased levels of leverage in combination with the securitization of mortgage-backed securities within the real estate sector would go on to lay the foundation for the financial crisis that would occur in 2008. Looking at the chart below, you can see that the mid-cap index, as represented by the S&P 400 Mid-Cap Index, strongly outpaced the large caps starting in the fall of 2003. The charts shown here reflect the typical performance gap between the two groups, which seems to be the norm in the majority of bull markets throughout history.

2009 to 2020

The bull market from 2009 to 2020 has been characterized as being slow and steady with a couple of major hiccups along the way.  Lasting 11 years, the uptrend for the S&P 500 generated a 15.8% annualized return for a total return of 400.5%. Again, as you can see from the chart below, mid-cap companies steadily outperformed their large-cap counterparts over the period. At this point, many investors look to relative volatility and risk. According to S&P Dow Jones Indices, mid-caps were about 15% more volatile than their larger counterparts. Over long time horizons, this type of volatility would likely be acceptable for most investors in return for outperforming the S&P 500 by 2.03% annually.

However, past performance is no guarantee for the future and no two bull markets are exactly alike. During the late stages of the 2009 to 2020 bull market, large-cap stocks started to outperform mid-caps, which would be a trend that would continue as the rally progressed. The strong relative performance from the large caps is largely driven by the sector breakdown of the constituents. In the case of the S&P 500, the strong allocation toward technology helped it outperform during this type of market period, as tech stocks were leading the way toward historic highs. This chart is a good reminder that sector allocation is yet another factor to consider when looking at comparisons between two different segments of the market.

March 2020 to March 2022

The COVID-19 pandemic changed the world in many of the ways that we live and work. The sharp drop in March 2020 and subsequent bull run to the peak in early 2022 was another notable period in financial history. Again, this period saw a strong performance by the mid-caps. As you can see from the chart, equity prices were highly correlated for the months following the selloff as investors around the world tried to assess the long-term impacts of the pandemic. As concerns of inflation and supply chain bottlenecks started to take hold in late 2021, the mid-caps started to show the common type of outperformance as demonstrated in the examples above.

The Bottom Line

Mid-cap stocks have outperformed their large-cap counterparts during many of the significant bull markets over the past twenty years. Some investors may find the added level of volatility to be worth the risk when they consider the type of results during bull markets, such as those mentioned in this article. While sector allocation and other factors do play a role in return, the consistency demonstrated by the mid-caps over the past 20 years suggests that this under-followed market segment deserves a closer look.