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What market conditions favor small cap stocks over medium cap stocks?
In general, small cap stocks are exposed to more downside during recessions and when credit is tight, because it is more difficult for small companies to raise capital, and minor variations in cash flow have a bigger impact. Coming out of recessions or when credit is cheap, small companies generally perform better than larger companies. In the depths of recession, small companies with good cash flow are often great value investments, as analysts and institutional investors "punish" the entire class of smallcap companies.