Weekly Small Cap Market Review: February 21 – February 24
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
I recently read an article that suggested the sheer number and scale of recent events whose outcomes have gone so much against the odds (Brexit, Trump, Super Bowl, the Oscars) is only explainable in the case that we are not real, but instead are part of a computer simulation, and the experimenter has decided to have some fun with the parameters. The arguments are statistical in nature, having to do with the relative cheapness of running a simulation versus the likelihood of life’s origin, suggesting that since one alien civilization can run millions of simulations, being a simulation is just the more likely outcome. To be clear, I think we’re real, and in the case of the Oscars, a tired and excited accountant just picked up the wrong envelope. Steve Harvey did the same thing last year at the Miss Universe pageant. PWC has been running the Oscar vote for 75+ years, and at some point, they would pull a Steve Harvey. Companies just pull Steve Harveys on occasion. They miss quarters, CEOs leave, and customers fire them. Particularly in small cap, where many companies do not have as robust a historical track record to lean back on, this suggests a diversified portfolio is key for long-term success.
The shortened holiday week was defined by questions around the robustness of the reflation trade. Treasury prices rallied for the third week in a row in response to greater uncertainty related to tax policy outcomes and the timing of infrastructure stimulus efforts. Large cap valuations continue to run, so the focus will be on earnings growth going forward.
The small cap market, as defined by the Russell 2000 Index, was down 0.4% overall during the week, with much of the week focused on questions around the long-term sustainability in the reflation trade. Similarly, large cap stocks (Russell 1000 Index), outperformed small cap stocks (Russell 2000 Index) by over 100 basis points and among small caps, Value slightly outperformed, with the Russell 2000 Value Index beating the Russell 2000 Growth Index by around 20bps. Within the Index, Utilities (+2.1%) and Real Estate (+1.2%) were strong performers as US treasury rates declined. Financials (+0.1%) was the other positive sector, up slightly. On the downside, Energy (-3.7%), Telecommunication Services (-2.4%), and Materials (-2.0%) were the weakest sectors.
Earnings season continues, and with over 60% of the Russell 2000 out so far, companies are reporting strong results, with around 60% beating Wall Street revenue estimates and almost 70% beating on the profit line. Looking forward, however, estimates for next quarter remain somewhat weak, with FX a key point of discussion for companies with foreign exposure there.