For the biggest players, the recession is more than over

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News about the end of the recession can seem peculiar or unfamiliar to many workers or to investors who haven't allocated their funds into the right sectors. Though unemployment is on the decline it remains historically high, and the swelling army of those who've left the workforce completely continues to grow. The S&P 500 ( SPY ) remains below its levels of five years ago, though the NASDAQ PowerShares ETF ( QQQ ) boomed since the recession on the strength of flagship firms like Apple ( AAPL ).

For many major large-cap corporations, though, the recession offered a chance to shed costly employees, outsource processes to cheaper international labor, buy up assets and acquire competitors at bargain basement prices. A new report from The Wall Street Journal shows that the sum total sales, earnings and employment of the S&P 500 companies now exceeds the same figure in 2007.

For instance, the Journal wrote, the average revenue per employee of these firms was $378,000 five years ago; it now stands at $420,000, an 11 percent increase in the rate of profit these firms derive from their labor pool. A lot of the extra money is going into other forms of capital - the Journal report indicated that capital expenditures surged 19 percent in 2011, compared to a 9 percent increase in 2010. Across the board, the firms now devote almost 6 percent of their income to capital expenditure.

When demand in the domestic market weakened, consumer firms looked overseas. The WSJ cites McDonald's ( MCD ) and Starbucks ( SBUX ) as examples of companies which derived massive growth from international revenue expansion, growing two to three times as fast in formerly underexploited markets like China, Brazil and India.

International expansion, capital accumulation and labor cost-cutting are easiest to leverage in a large organization, so the benefits of these strategies tend to accrue to large-cap companies. A look at ETF trends over the last year seems to back this up: while SPY is up almost 4 percent since April 2010, Vanguard's Small-Cap ETF ( VB ) is down about 1.5 percent and the iShares Russell 2000 ETF ( IWM ) declined nearly 3 percent.

But over the long term, investors might be better served by small companies, as the benefits of growth may not necessarily accrue to shareholders of larger firms. Of those same 3 funds, SPY delivered the lowest returns - just under 23 percent - over the five-year period measured by the WSJ. The Russell 2000 ETF climbed more than 32 percent while the Vanguard fund rose over 36 percent since April 2007. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Economy , ETFs , Investing Ideas

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Daniel Pereira


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