Weekly Small Cap Market Review: July 3 – July 7
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
I’ve read a lot of discussion recently around active and passive investing and with the market continuing to move upwards, many have claimed that passive indexing is the inevitable path. Recently, they have been right: through the end of 2016, passive funds outperformed active management for six of the last seven years as low interest rates indiscriminately drove up multiples and correlations hit highs. Passive investing has its place, but what many don’t focus on is that like most trends, the last seven years is only a sliver of a longer cycle. For example, just the reverse happened for the entire first decade of the millennium: active outperformed all but one year, including the tech bubble and the period before, during, and just after the financial crisis. And this continues as you go farther back over the last 30 years – sometimes one wins, and sometimes the other does – at around a 50/50 split. However, during periods of high dispersion and market corrections, active management does much better. It’s easy to look at short-term trends and believe they represent the long-term environment, but, pardon the pun, it’s short-sighted.
The small cap market, as defined by the Russell 2000 Index, was up 0.1% overall during the holiday-shortened week. The market’s flatness was driven by the balance between higher yields driven by the European Central Bank’s comments on an improving reflation environment, and stronger economic trends like better-than-expected payrolls in the U.S. Financials (+1.2%, with higher yields supporting banks and insurance companies), Health Care (+0.7%, with biotech continuing its recent performance), and Information Technology (+0.4%, driven by equipment and semiconductor manufacturers) were the strongest sectors in the Index. Energy (-4.3%, as WTI fell almost 4%), Telecommunications Services (-2.0%, as dividends were less attractive versus higher bond yields), and Consumer Discretionary (-1.1%) were the weakest. Overall, small caps were in line with large caps as the Russell 2000 Index returned around 5 basis points less than the Russell 1000 Index (also up 0.1%). Among small caps, growth slightly outperformed value, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by 30 basis points.
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