Weekly Small Cap Market Review: April 10 – April 14
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
I was in Savannah, a port town which just beckons for languid strolls through beautiful squares filled with Spanish moss, over the long weekend. The first city in Georgia, it is acutely aware of its own history, both positive and negative. But just up the river from the warehouses and gas lit alleys of the old port, now filled with tourists taking advantage of the city’s liberal open container policy, is the new port, the 2nd largest container export terminal in the United States.
The port is important. In addition to supporting $84bn of economic value and over 350,000 jobs in Georgia, it demonstrates that an old town doesn’t have to become just a museum exhibit (albeit a beautiful one.) It can continue to compete if it takes advantage of its embedded characteristics (a deep river 4 hours from a number of major metropolitan areas) and invests behind them. Companies need to do the same. In the small cap world, growth is key to value, and assets (whether tangible or intangible, human or technological) need to be utilized. Otherwise they too can get stale. There are many museum exhibit stocks out there, and their managers themselves choose whether their company will settle or thrive. It’s a garden of good and evil out there, and we think looking for improving earnings in small cap certainly makes it easier to be on the good side.
The small cap market, as defined by the Russell 2000 Index, was down 1.4% overall during the week, with the “STUB” trade continuing to perform well in the face of geopolitical concerns (Syria strike, US-Russia relations, North Korea saber-rattling, French elections), political uncertainty around the timing of policy reforms (health care, taxes), and a potential government shutdown. In response, the market focused on safety, with Treasuries, gold, and STUB stocks all doing well. Rate plays like Telecom (+3.8%), Real Estate (+1.2%), and Consumer Staples (+0.5%) were the strongest performers for the second week in a row, and more cyclical and inflation-leveraged Materials (-3.1%) and Energy (-3.0%) weaker. In total, small cap underperformed large cap, with the Russell 2000 Index lagging the Russell 1000 Index by around 30bps. Among small caps, growth was strong, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by around 60bps.