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In our Friday morning investment team meeting, I asked whether or not anyone could make sense of the continued divergence between mid/large cap stocks vs. their small cap brethren... With the S&P 500 -12.6% YTD and the Russell2000 only down -3.5% YTD, this remains a critical question. Can the divergence hold? Will small caps underperform in September and revert to the mean? Etc…

Hindsight is always crystal clear… now that virtually every US "strategist" is back pedaling on their expectations for large caps to outperform in 2008, there are a few, but simple question to ask yourself - are we seeing the insulated US centric American Capitalist emerge out of this financial mess in small cap outperformance? are large caps the best way to play the "its global this time" Wall Street narrative of yesteryear on the short side?

Until proven otherwise, I think the answer to both of these questions is yes. There are a variety of other stylistic factors to consider in terms of explaining the smaller cap index outperforming big brother, but I will leave those for another time. With crisis, opportunity is always born. Here’s to the new American leadership that is forming on Main Street.

Charts below courtesy of Stockcharts.com, showing the Ausgust scorecard: SP500 +1.2% vs. Russell2000 +3.5%.
KM