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Posted by on Mar 8, 2017 in Cornerstone Investment Partners, Small Cap Market Review

Weekly Small Cap Market Review: February 27 – March 3

Weekly Small Cap Market Review: February 27 – March 3

By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)

 
A close college friend is getting married in May, and I traveled to New Orleans this weekend for his bachelor party. As the only investor in a group otherwise made up of much smarter doctors, writers, and musicians, I was asked how investors think about picking stocks for a portfolio. We were on Frenchman Street, listening to some great music, so I used jazz as a metaphor (pardon me if this echoes Baldwin’s ‘Shadow and Act’ too much). For the more classically-inclined, an orchestra is the same idea. A jazz band is made up of a collection of different instruments and players. Sometimes they play together, and hit a harmony that can blow the doors off. However, at the same time, each is playing his or her own piece, with individual riffs and improvisations. The beauty of jazz is in that improvisation, that the same band is likely to play the same piece differently tomorrow to respond best to each audience. So it is with investing – A good diversified portfolio reflects the balancing act between the harmonies (the market risk) of the portfolio and the improvisations of individual stocks (the idiosyncratic risk), and the need to adjust it in a way that best responds to the market as a whole.

The small cap market, as defined by the Russell 2000 Index, was flat overall during the week in highly volatile trading (first time the Russell 2000 Index had three 100bp moves in a row since the election). Donald Trump spoke to a session of Congress on Tuesday and while investors reacted positively on Wednesday in response to his more measured tone and policy endorsement initially, a lack of policy specifics and significantly increased expectations for a March rate hike (up from 50% to 80% likelihood, driven by stronger customer and producer confidence) supported relative strength in large cap stocks (Russell 1000 Index) versus small cap stocks (Russell 2000 Index), up this week by 65 basis points. Among small caps, however, Growth significantly outperformed, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by around 100bps, but almost 2/3 of this was driven by the Growth index’s healthcare exposure.

Within the Index, Health Care (+3.1%) was the strongest performer as biotechs and pharma ran on Trump’s statements suggesting regulation will be softened. Materials (+1.2%) and Industrials (+0.3%) were also up, as economically-sensitive and inflation-driven sectors were also buoyed by the speech. On the downside, Telecommunication Services (-2.4%) and Energy (-2.0%) were the weakest.

Earnings season continues, and with almost 80% of the Russell 2000 out so far, companies are reporting decent Q4 results, with around 60% beating Wall Street revenue estimates and around 65% beating on the profit line. Looking forward, however, estimates for next quarter remain weak, with over half of Q1 estimates going down due to guidance or other factors. Given high valuations, it is important to consider how reduced growth expectations will affect performance.
 
2017.03.08_Cornerstone
 

The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.

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