The Goldilocks Principle continues to be upheld, seeing that there is substantial precedence for strong mid-cap performance during financial crises. Bartolini comments, “In some periods, the S&P 500 might perform better, but when you take it across these risk events, mid-caps have had shallower drawdowns and recovered quicker.” Bartolini also mentions that the same tendencies for mid-caps were also present during the Asian currency crisis (1997), Russian financial crisis (1998), and dot-com bubble (2000). Following 2008, the S&P Mid Cap 400 achieved higher returns than both the S&P500 and S&P Small Cap 600. Back-tracking to the 2008 financial crisis, many mid-cap indices outperformed the broader market and small-cap companies. These implications provide some evidence as to why the Goldilocks’ Principle may hold and why mid-cap stocks – and not small, large, or mega-cap stocks - may show promise during these trying times.īeyond the explanations above, Bartolini’s research provides historical evidence for the utility of mid-cap stocks following major crashes. More recently, the VIX has increased in uncertainty and the volatility has reached all-time highs largely due to momentum riding and the large trading volume from “ Robinhooders ,” a new wave of uninformed day-traders. The VIX estimates the expected volatility of the S&P 500 by weighing the prices of different options, specifically puts and calls, and their respective strike prices. Standard deviations and more generally the CBOE Volatility Index (VIX) are able to visualize this volatility. Moreover, these larger corporations often go through significant fluctuations that are unrelated to company fundamentals, further leading to heightened volatility. As a result, these firms are not as flexible in their operational decisions as mid-cap companies and are limited in terms of the actions they are able to pursue. On the other hand, risk-averse investors find large and mega-cap stocks are too volatile because they draw too much public and Wall Street attention. As a result, regulations increase the cost of capital and reduce the fair value investors are willing to pay for these stocks. Specifically, these regulations make raising sufficient capital to weather adverse economic conditions more difficult at a small size. regulations have diminished the returns and increased the risks associated with smaller companies. Accordingly, you may be wondering, why not look to small-cap stocks? As it turns out, small-cap stocks usually hold less risk, but U.S. Companies decrease investments, consumers reduce spending, overall uncertainty rises, and mean-variance preferences emphasize toward lower variance. As small-cap stocks continue to lag, it now seems more likely that the safe haven for investing during these uncertain times happens to be mid-caps.ĭuring crises, investors’ risk aversions are at an all-time high. For Matthew Bartolini and a few others, the Goldilocks Principle looks to mid-cap stocks to avoid extremes and to generate “just the right amount” of return and variance.

In statistics, the principle refers to linear regression models with just the right amount of bias and variance to reduce error.

For example, in developmental psychology, the principle refers to an infant’s proclivity to try out activities that are not too simple, not too complex, but just the right level of difficulty. This premise upholds the Goldilocks Principle, the concept of achieving “just the right amount” by avoiding extremes, that applies across a vast range of fields. He noticed that mid-caps have historically been top performers during crises or pandemics. In his most recent research report, Head of SPDR Americas Research Matthew Bartolini came out with a hypothesis that mid-cap stocks happen to be the sweet spot along the market capitalization spectrum. However, analysts are increasingly finding that stocks in between that wide net seem to be the best option during financial crises.

The many options for market capitalization among companies range from nano-caps at less than $50 million to mega-caps in excess of $200 billion. Researchers are noticing that a good way to find this sweet spot and optimize mean-variance – maximizing returns for a given level of risk – is to filter by market capitalization. Traders this pandemic season are trying to mimic that same strategy with not too much volatility, not too little return, but just the right portfolio fit. “Not too big, not too small, but just right,” said Goldilocks, as she rummaged through the different bowls of porridge.

Goldilocks principle