Weekly Small Cap Market Review: February 6 – February 10
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
It’s February, and I’ll excuse you if you find the financial news, including this newsletter, somewhat one-note at this point. When the White House Press Secretary’s daily press conference serves as must-see TV (while “The Blacklist,” which is a very fun show, languishes unwatched on the DVR), it seems obvious what is driving the market’s daily gyrations. This is particularly true in small cap, an asset class with outsized exposure to changes in regulation, taxes, and domestic economic policies.
The small cap market, as defined by the Russell 2000 Index, was up 0.8% overall during the week. Key news from the week included an announcement that the White House would release a tax plan in the coming weeks, which helped to energize the recent reflation trade. The EIA announced that crude oil inventories increased by significantly higher levels than expected, yet crude prices increased, as the market focused more on the impact of lower gasoline inventories.
Within the Index, Consumer Discretionary (+2.1%) was a strong performer on restaurants and apparel, with border-adjustability a topic adding volatility to the industry. Information Technology (+1.5%) was strong, with returns driven from hardware and IT services. Health Care (+1.3%) continued last week’s rally, with biotech and pharma up again. On the downside, Energy (-2.3%) and Telecommunications Services (-0.7%) were the weakest sectors for the second week in a row, with both upstream producers and service providers down over 2% on the week. Small caps (Russell 2000) performed in line with large caps (Russell 1000), and among small caps, Growth again outperformed, , with the Russell 2000 Growth Index beating the Russell 2000 Value Index by around 80bps.
Large cap earnings season continues, and with almost 75% of the S&P 500 out so far, companies continue to report strong results, with around 80% beating on the profit line for the second quarter of growth in a row. Small cap is still early, with around 36% of the Russell 2000 reported, but results have been similar, with revenues in-line and better-than-expected profits. This upcoming week is one of the biggest earnings weeks for small caps, with almost a quarter of the entire index expected to report.
Recent comments from well-respected investors Larry Fink and Seth Klarman indicate that business-friendly shifts in policy goals have driven up valuations, and the market as a whole appears to be moving longer-term ideas rather than underlying strength and corporate investment. Longer-term movements in wages continue to be strong with labor market tightness support. Input costs are also going up, and the Fed continues to be positioned for at least two additional hikes this year. With inflation broadly expected to increase and consumers able to pay for those costs, earnings growth may be more robust than some perceive it to be. It will take time for that to roll through, so with this type of “air” in the market, it is ever more important to focus on individual stock selection.