Weekly Small Cap Market Review: July 24 – July 28
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
As boring at it may sound compared to, say Game of Thrones, I enjoy reading perspectives on the market by other investors. Part of this is to ensure my own humility, as I will likely never as successfully synthesize what is happening in the world as people like Warren Buffett and Howard Marks seem to be able to do consistently. But take away the computers, algorithmic systems, and even the phones, and the stock market is a modern version of the Athenian Agora or Roman Forum, where people come together to debate the worth of a piece of cloth. And even the best investor gets the price of that cloth right just over half of the time. Since the market is just a collection of people, it is necessary to understand how other people think. Howard Marks’ most recent memo, titled “There They Go Again…Again,” is less a call to arms than it is a call to thought. He himself admits the point of the piece is nothing new, and many topics, including the discussion of active vs. passive and the relative valuation of the market, are things we, as well as many other investors and writers, have written about either here or in our own client letters for the last few years. But the breadth that short-termism, risk complacency, and “TINA” (There Is No Alternative) has influenced valuations across equity and fixed income markets requires us to take pause.
One of my colleagues here at Cornerstone, when someone challenged him that CAPM (the Capital Asset Pricing Model taught in Finance 101 classes) was the most appropriate tool to value stocks, responded, “If you believe that the market gets the price of assets wrong, then how can you not think it gets the price of risk wrong too?” With questions over growth, macroeconomic policy, global political stability, and disruptive business models and technologies, the only thing that is certain about the market is that things are uncertain. I don’t know if the market will go up or down (Marks seems a bit more confident in the latter, even if he himself wrote only unlimited time will prove him right), but I do know that things change constantly, and we as investors need to be able to respond in kind.
The small cap market, as defined by the Russell 2000 Index, was down 0.4% overall during the week. The market was generally down during the week, with the Federal Reserve holding rates steady (as expected), earnings season beats not running through small cap yet, and continued Washington policy questions. Energy (+2.2%, as WTI ran over 8% on US inventory declines and potential Saudi export caps), Real Estate (+0.5%), and Consumer Discretionary (+0.4%) were the strongest sectors in the Index. Health Care (-1.6%, on the failure to pass legislation), Materials (-1.2%), and Information Technology (-0.9%) were the weakest. Overall, small caps underperformed large caps as the Russell 1000 Index was flat. Among small caps, value outperformed growth, with the Russell 2000 Growth Index returning around 40 basis points less than the Russell 2000 Value Index for the week.
Earnings season has begun for small caps, with approximately 30% of the Russell 2000 reporting so far. Like recent quarters, companies have reported both top-line (~65%) and bottom-line (~70%) beats, but forward guidance has been more muted, with only half of companies seeing increases in 3Q estimates so far.
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.