Small Caps Reward Big Spending

Since early September, small-cap stocks have outperformed large-cap stocks. Investors' recent enthusiasm for small caps is evident in their positive view of high capital spending. The chart's red line highlights a consistent positive return for being long stocks with high Capex-to-Assets ratios and short stocks with low ratios during this period, namely a consistently positive Capex-to-Assets factor return since early September. The small-cap rally reflects an assumption that the risks associated with high capital spending are worth taking--a risky bet.