Is it time for small-cap stocks to finally have their moment back in the sun? This question was more frequently asked leading up to September’s Federal Open Market Committee (FOMC) meeting. Both interest rates and the primary credit discount rate charged to banks were lowered. Both cuts were the first since December 2024.

These types of monetary changes have historically provided a favorable backdrop for small-cap stocks. Smaller companies have less access to the bond markets than their larger brethren. Looser monetary policy also supports economic growth.

While small-cap stocks have underperformed over the last 15 years, it is easy to forget what happened during the 2000s. Small-cap stocks realized a 6.3% annualized return, while large-cap stocks experienced a lost decade. The 10-year annualized return for large-cap stocks was –1.0%.

This outperformance by small-cap stocks was not a fluke. Small-cap stocks have outperformed large-cap stocks during 58 out of the last 90 rolling 10-year periods. This is a 64% win rate.

Contributing editor Paul Merriman has long advocated for including an allocation to small-cap blend and small-cap value stocks in portfolios. This month, he explains how the traditional 60% equity/40% bond allocation can be improved by incorporating small-cap stocks.

Traditionally, the 60% equity/40% bond allocation has consisted of large-cap blend stocks (e.g., an S&P 500 index fund) and investment-grade bonds. Merriman found the allocation to work better when large-cap value, small-cap blend and small-cap value stocks were added. Downside risk was reduced as well, which is a win-win. Click here to read Merriman’s article.

This month’s issue also features Wayne Thorp’s last two articles for the AAII Journal as part of the AAII staff. Throughout his 28 years at AAII, Thorp has written many articles for the AAII Journal while also overseeing Stock Investor Pro. His contributions are too numerous to list, but they include being the voice of Computerized Investing, Stock Superstars Report and, more recently, Growth Investing and Sentiment Investing.

Many of you have had the opportunity to meet or correspond with Thorp over the years. He’s been a valuable part of the AAII family. On behalf of everyone here at AAII, we wish him success in his future endeavors.

Wishing you good health and prosperity,