A funny thing happened in late 2020. As confindence started to return to the stock market, the FTSE 250 raced ahead of the FTSE 100.
Since then, the bite of inflation has started to hurt. And the appetite for mid-cap stocks has waned. Both indexes are now only a few percent apart over five years.
But you know what just happened?
Mid-caps coming back
In November, the FTSE 250 started to pull ahead again. It gained 6.7% in the month, compared to the FTSE 100’s 2%.
Now, this might just be a bit of random noise, and it might not mean anything at all. But it does come at a time when optimism is creeping back into the markets.
Inflation has come down further, and that’s sparking thoughts of interest rate cuts. The Bank of England has dismissed the idea, and says there’s no cut on the cards yet.
Optimism returns
But other central banks already sound like they might be softening their stances. And that has to be a good sign.
We also see some of the stocks most hammered by interest rate rises climbing back again. Investors are even buying back into housebuilder shares, after shedding them as mortgage rates soared.
Over at investment platform AJ Bell, Taylor Wimpey and Persimmon were among November’s top 10 buys.
Long-term winner
The UK’s two top indexes have tracked market sentiment this way a few times in the past.
When times are happy, buyers will often put more money into smaller growth stocks. And when things look glum, there can be a tendencey for money to move away from the risk and into those safe blue-chip giants.
Since the two indexes launched back in the 1980s, the FTSE 100 has risen by 400%. But the FTSE 250 is up more than 1,000%
Don’t forget dividends
The bigger stocks have typically paid more in dividends, and that will bring the two results closer together.
But for those who can handle the volatility and are in it for the long term, it does look like the FTSE 250 might have been the better bet.
What do we do now?
Do I take this single month’s chart to mean I should switch my investments to mid-cap growth stocks?
Well, no. Trying to time things like that is a mug’s game. The more often I sell one thing and buy another just because I think sentiment is changing, the more I’d rack up in costs.
But it does guide me in one way.
Watching smaller stocks
What it means is that for new money I have to invest as we head into 2024, I’m going to look more closely at some of my top FTSE 250 candidates.
I make my choices on the performance of a company and the valuation of its stock, and not on what index it’s in.
But if I see signs that some undervalued stocks could be set for a year or more of gains, it could swing me in their direction.
