Weekly Small Cap Market Review: December 11 – December 15
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
It’s easy to focus on the macro. You can read headline after headline discussing the Federal Reserve, Congress, consumer sentiment indices and wage inflation. And I’m as much at fault as anyone. When dealing with a market as diverse as small cap, we want to find common threads that seem to move the market. But as I said a few weeks ago, the market is made up of thousands of individual companies which face unique product, competitive, customer, and managerial circumstances. Particularly in small cap, those circumstances are as much or more micro than they are macro. So while sometimes stocks do move in response to the big things, the big moves actually relate to the small things.
Instead, ask yourself, who is the customer? What does he or she need? Can this company really provide it? If so, what is differentiated about what they provide? While investors aren’t managers, put yourself in a manager’s shoes and try and answer these questions. We don’t have anywhere close to the information that they do, so don’t expect to solve anything, but it certainly helps to take us out of the desktop diligence bubble and opens our perspectives a bit more.
Small caps were up for the week, with Technology names recovering somewhat after weakness last week. Overall, it was a confidence-boosting week, with tax legislation advancing significantly, the Federal Reserve increasing rates as expected, and good macro data (including retail and PMI). There were some questions in the media whether small caps would receive as much benefit as perceived from tax cuts, and they have slightly underperformed large cap recently. However, recent performance likely reflects the increase that has already occurred in response to the tax bill, and instead investors are looking to gain a wider exposure. With a deregulating environment, small companies that face increasing regulatory-driven costs should benefit over time.
The small cap market, as defined by the Russell 2000 Index, was up 0.6% overall during the week. Information Technology (+2.1%), Real Estate (+1.2%), and Industrials (+0.8%) were relative outperformers in the Index. Energy (-2.6%), Utilities (-1.1%), and Consumer Staples (-0.0%) were the weakest. On a style basis, small caps underperformed large caps, as the Russell 1000 Index was up 0.9%. Among small caps, growth outperformed value, as the Russell 2000 Growth Index returned approximately 30bp more than the Russell 2000 Value Index.
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.