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Posted by on Sep 5, 2017 in Cornerstone Investment Partners, Featured, Small Cap Market Review

Weekly Small Cap Market Review: August 25 – September 1

Weekly Small Cap Market Review: August 25 – September 1

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

Investing requires the ability to compartmentalize. It’s right to get emotional and focus on the human scale of the issues of the day, such as disasters like Hurricane Harvey, geopolitical chess moves like North Korea’s burgeoning nuclear arsenal, and domestic policy changes like DACA. Particularly today, it’s also easy to let our own political lens affect how we see the world, conflating personal hopes with statistically likely outcomes. But the market stops for no one. Instead, investing means doing the hard work of shutting down those emotions and biases to make good decisions for clients.

Let’s use Hurricane Harvey as an example. I can’t fathom what Texas and Louisiana residents (and for that matter, New Orleans residents in 2005, and the list goes on) have just gone through over the last week. But what I do need to fathom is the effect on the market and my portfolio. Energy: Refinery and production platforms shut down. Insurance: P&C payouts, with higher prices in the future. Those were easy. But how about truckers, chemical companies, construction products distributors, and rental apartment owners? Are RV manufacturers poised for success, since someone has to make all the FEMA trailers? What about the fact that families will have to live in them? My heart hurts when I see images on TV of people’s homes under water and their lives thrown upside down, but client asset stewardship forces us to keep watching, since there is an opportunity to both make and lose money when events like this happen.

Politically, it can be similar. Say someone wanted the tax system, or health care, to be reformed. If that person looked at the world in January, he or she might have believed it was possible, and quickly. That person is likely a Republican who just watched a come-from-behind victory for his or her candidate, who is now armed with a Republican-controlled congress rip-roaring to take action. But that hope can’t color investing decisions. As we’ve seen, Washington is a complicated place and policy changes of that scale are long, difficult, slogs that will be fought in the trenches of the political battlefield.

I don’t suggest we all become automatons. It is the emotional checks and balances of human investing that makes the market what it is, and protects it from what it could become. But we do sometimes need to separate our heads from our hearts, as tough as that can be. And it certainly doesn’t stop you from giving freely to help those in need, whether through financial or in-kind support.

The small cap market, as defined by the Russell 2000 Index, was up 2.7% overall during the week. Health Care (+6.3%), Materials (+4.4%), and Industrials (+3.8%) were the strongest sectors in the Index, as biotech rallied from expectations for additional M&A in the space, China manufacturing data was strong, and industries leveraged to rebuilding in Houston like Engineering & Construction received bids. Financials (+0.2%), Utilities (+0.3%), and Real Estate (+1.5%) were the weakest, as insurance companies and bond proxies were weak.

On a style basis, small caps outperformed large caps for the second week in a row, as the Russell 1000 Index was up 1.5%. Among small caps, growth outperformed value, with the Russell 2000 Growth Index returning around 175 basis points more than the Russell 2000 Value Index for the week.

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.