May was the month for mid-cap stocks

As U.S. equity markets outperformed much of the world in May, it was a banner month for the often-overlooked mid-cap category.

In a month that saw the S&P 500 gain an impressive 4.8%, as parts of the economy started to reopen following the COVID-19 shutdowns, the S&P MidCap 400 gained 7.3%.

“What went down the most in the bear market, led in the month of May for the most part,” said Paul Schatz, president of Heritage Capital.

“It is very healthy to see small- and mid-cap stocks lead instead of the defensive sectors, which is what was happening at the end of the rally in February and during the rallies in March,” he added.

Clearly, the smaller company stocks had a bigger hole to climb out from the pullback in February and March.

The mid-cap index, for example, is still down 13.9% from the start of the year, while the S&P 500 is down just 5% over the same period.

On the 12-month-trailing basis the S&P 500 is up 12.8%, while the mid-cap index is down 80 basis points.

But the strong performance by mid-caps in May underscores the nimble nature of smaller companies, particularly in rebounds.

“Mid-cap companies tend to have more earning growth potential because they tend to be more locally focused than large caps, but they also tend to have more stability than small caps,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

The S&P SmallCap 600 Index gained 4.3% in May and remains down 20.8% from the start of the year.

While growth, momentum and quality stock categories all performed better than value and low-volatility strategies in May, it would have been difficult to find a weak spot among mid-sized companies during the month.

The large-cap value category gained 3% in May, while mid-cap value gained 6.3%.

“The market perceived a return to normalcy, even if it’s not the reality,” Rosenbluth said. “With mid-caps, what stands out is you could have gone down to more moderately sized companies and gone the value route and still been okay.”

In terms of the value route, which has been lagging in terms of growth for a long time, investors could have even gone down to small-cap stocks and done at least as well as large-caps in May.

While smaller-company stocks are still down more than large-caps since the start of the year, mid-caps have made the strongest recovery so far off the March 24 bottom.

From that trough through the end of May, mid-caps are up 31%, which compares to a 24% gain over the same period for both large- and small-cap stocks.

Matthew Bartolini, head of SPDR Americas research at State Street, has studied the performance of various market-cap categories over four systematic market events dating to the late 1990s and said, “mid-caps tend to have lower drawdowns and faster recovery times.”

“The reason is they occupy this sweet spot of paring operational dexterity of small-caps with the business capabilities of large-caps,” he said. “Mid-caps are also close enough to the real economy that they may benefit from stimulus activity.”