The implied equity risk premium which I computed to be 6.01% on April 1, 2020, has declined to 6.27% if I compute the risk premium using the (now stale) earnings and cash flows, and 5.60%, if I assume a 30% drop in S&P 500 earnings this year and a substantial drop in buybacks. The S&P 500 fell more than 5% in premarket trading, triggering a circuit breaker to halt trading. In fact, if there is a message in these returns, it is that the post-COVID economy will be tilted even more in favor of large companies, at the expense of small ones, as other businesses follow the tech model of concentrated market power. As with active and value investing, there are some who believe that the fading of the small cap premium is temporary and that it will return, when markets change. One reason that the small cap premium resonates so strongly with investors is because it seems to make intuitive sense, since it seems reasonable that small companies, with less sustainable business models, less access to capital and greater key person risk, should be riskier than larger companies. However, one needs to be fully aware of the better business opportunities and all the risk factors involved that might create a substantial hindrance to the business and retard its growth on the whole.
Value effects: If a market trigger has an effect on one or more of the three drivers of value, which are cash flows, growth and business risk, it can affect value. If the trendy boutique can break through $2.7 resistance next week, we should see a strong upside move. If ARNA can break back up through $4.00, I will jump in for a trade. Following the chart structure and price patterns, I believe the stock shall break its underperformance and pass on the baton to bulls from bears, which took hold on for the past 4 years. You should be willing to track these candidates for more than 2 to 3 years. Instead, the future will belong to multidisciplinary money managers, who have well thought-out and deeply held investment philosophies, but are willing to learn and quickly adapt investment strategies to reflect market realities. Going back to 1927, the smallest cap stocks have delivered about 3.47% more annually than than the rest of the market, on a value-weighted basis.