Weekly Small Cap Market Review: January 23 – January 27
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
Last week was quite busy, but I expect that we will rarely get the opportunity to say something otherwise this year. President Trump had a very active first week in office, pulling out of the Trans-Pacific Partnership (“TPP”), calling for $1 trillion of spending on infrastructure projects, pushing for a border wall with Mexico, and suggesting he could cut corporate regulations by at least 75%. Along with actions taken just before and after the inauguration to repeal key elements of the Affordable Care Act, the President has acted quickly, decisively, and sometimes without deep congressional support, on a number of key campaign promises.
The small-cap market, as defined by the Russell 2000 Index, was up 1.4% overall for the week, as the President’s actions gave increasing confidence to the market that expected growth-oriented economic policies will be implemented. Within the Index, Materials (+3.5%), Industrials (+2.3%), and Financials (+2.0%) were relative outperformers, as the “Trump trade” ran. Safety stocks like Consumer Staples (-0.9%) and Real Estate (-0.1%) were relatively weaker. Small caps (Russell 2000) outperformed large caps (Russell 1000) by around 35bps, and among small caps, Value was slightly better, with the Russell 2000 Value Index beating the Russell 2000 Growth Index by around 25bps.
Earnings season has just begun, but most small cap companies in the Russell 2000 Index will not report for a few weeks. Among the 12% or so that have reported, revenue estimates appeared to be about in line with actual reports, but EPS targets have been beaten by over 70% of companies reporting.
In domestic-oriented small-cap, it appears that the market continues to move on the political winds. But in the short-run, investment performance is most often directly linked to fundamental performance, and earnings season will help us understand how companies are reacting to any potential changes. In the long run, we continue to wait to see what these actions will have in store.