Historically, the broad stock market has often been positive even starting in economic recessions. But what about small cap stocks? Conventional wisdom holds that smaller companies often bear the brunt of economic downturns. So, what does the data tell us about the size premium when GDP growth slows?

Plotting annual return differences between small cap and large cap stocks against contemporaneous GDP growth for developed markets shows no discernible relation between the two. For example, there were 73 instances of a country experiencing a decline in GDP for the year. Small caps outperformed large caps in that country/year 47 out of those 73, or 64% of the time. That's higher than the frequency across all country/year observations, which was 54%.

These results shouldn't be too surprising since markets are forward-looking. As expectations for the future change, market prices continuously reset to a level where investors can expect positive premiums, including the size premium. This means small caps can still outperform, even if we eventually find ourselves in an environment unfavorable to small company success.

This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients. It is republished here with permission of Dimensional Fund Advisors LP. No further republication or redistribution is permitted without the consent of Dimensional Fund Advisors LP.