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Posted by on Feb 8, 2017 in Cornerstone Investment Partners, Small Cap Market Review

Weekly Small Cap Market Review: January 30 – February 3

Weekly Small Cap Market Review: January 30 – February 3

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

I write to you from Atlanta, a deflated city. If you shut off the television last Sunday night right after Lady Gaga’s drone-assisted halftime show (with Pepsi as the sponsor, even the drones were against Atlanta), you might have been surprised to see a triumphant Tom Brady on the front page of the newspaper. My on-the-field (or on-the-bench) football career ended after freshman year of high school, but the Falcons seemed to get soft in the second half and played to not lose, versus playing to win. It just goes to show that performance can turn on a dime, and discipline is key for success in any field.

With another busy week, the small cap market, as defined by the Russell 2000 Index, was up 0.5% overall, but had two wildly divergent days of performance. Monday was down 1.3% on the uncertainty arising from the response to the immigration executive order, while Friday was up 1.5% on good jobs numbers (nonfarm payrolls up 227K versus 175K consensus) and discussion around financial deregulation (Dodd-Frank and fiduciary rule). The unemployment rate went up slightly, from 4.7% to 4.8%, but it was driven by increased participation in the workforce, a positive.

Within the Index, Health Care (+3.1%) led the charge this week after key pharmaceutical executives met with the President. While Trump echoed his calls for lower drug prices, he suggested that his administration would reduce manufacturing regulations and increase the speed to market for new drugs. Consumer Staples (+1.1%) and IT (+0.7%) also performed well, with reflation trades, on good semiconductor performance and court actions leading to potential softening on immigration reforms after a very contentious week. On the downside, Energy (-1.1%) was weak from large cap corporate earnings that indicated low profitability is likely when companies report in a few weeks, and Telecommunications (-2.6%) also underperformed. Small caps (Russell 2000) outperformed large caps (Russell 1000) by around 30bps, and among small caps, Growth returned to the lead, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by around 65bps.

Large cap earnings season continues, and with over 50% of the S&P 500 out so far, companies continue to report strong results, with almost 80% beating on the profit line for the second quarter of growth in a row. Small cap is still early, with only around 23% of the Russell 2000 reported yet, but results have been similar, with revenues in-line and better-than-expected profits. This improved sentiment has also led Wall Street analysts to increase their EPS estimates for over two-thirds of those Russell 2000 companies already reported. According to work done by Citigroup, three-fourths of the Russell 2000’s return since 1990 has come from earnings growth, so these numbers are heartening.

Politics will likely continue to have a meaningful impact on market performance for the foreseeable future. The Wall Street Journal wrote a piece during the week that over half of the companies in the S&P 500 mentioned the President or his potential policies during their conference call. While executives have generally been positive in their approach, it is obvious that like the Super Bowl, there will be winners and losers in these policy debates, and it is the discipline to develop and consistently implement an investment philosophy that will drive long-term performance.

While we don’t get a parade down Peachtree Road (or Street, I’m never sure), at least I can lean on the fact that the Giants beat the Patriots twice in the Super Bowl!
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