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  • October 23, 2012

    Over the last 20 years, many of the factors driving stock prices have changed significantly. In a recent interview, Larry Puglia, manager of the T. Rowe Price Blue Chip Growth Fund, and Greg McCrickard, manager of the T. Rowe Price Small-Cap Stock Fund, reflect on some of the changes, the challenges, and their outlook for the market. Both managers have about two decades at the helm of their respective funds.

    Small-Caps

    McCrickard notes that small-caps as an asset class were generally neglected by analysts and the media 20 years ago. In 1998, several prognosticators went so far as to state that small-cap investing was dead. But the Internet boom was, in many ways, responsible for resuscitating the segment. Today, investors scrutinize every growth opportunity and that's had an impact on the market's structure. For example, small-caps now generate significant trading volume, which has improved the liquidity for companies in the asset class.

    Large-Caps

    When asked about the major factors influencing the large-cap market space over the past 20 years, Puglia points to globalization. Most large-caps today have a significant global presence, and he notes that many companies in his portfolio derive approximately half of their revenues and profits from operations outside the United States. This development means that blue chip, domestically focused investors now have more exposure to overseas markets—and greater diversification as well. Of course, the flip side is that doing business in non-U.S. markets entails unique risks, such as currency fluctuations and political unrest.

    Equity Market Expectations

    Puglia notes that predicting the market's direction is difficult given all the uncertainties in this environment. Investors need resolution to several major issues for stocks to gain traction. Near the top of his list are the upcoming elections and entitlement spending—closing loopholes and simplifying the tax code to raise revenue would, over time, help to reduce the country's deficit. Corporate America is in pretty good shape, and in general, balance sheets are very strong. If investors see progress in the European sovereign debt situation, a rebound in China's growth, and that inflation does not become a major problem, the global economy could do well, and stocks could continue to make solid progress.

    McCrickard agrees that if we get a favorable resolution to these challenges, the prospects would be good for small-caps as well as large-caps. Small-caps have lagged large-caps recently as investors have shunned riskier assets. He notes that negative sentiment is pervasive among retail investors, who view the equity markets as an unsafe place to invest—a situation very similar to the one in which he began his investment career in the early 1980s. As a result, he believes contrarians can find interesting opportunities that will make them happy that they stuck with the equity markets over time.

    Because growth stocks have higher valuations and lower dividend yields than slower-growth or cyclical companies, the share price volatility may be higher. As such, fund prices could decline further in market downturns than non-growth-oriented funds. Small companies tend to have less experienced management, unpredictable earnings growth, and limited product lines, which can cause their share prices to fluctuate more than those of larger firms. Because the Small Cap Stock Fund invests in both growth and value stocks, its share price may be negatively affected by the risks inherent in each style.

    These views are as of October 4, 2012 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

    Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.