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Posted by on Jul 27, 2017 in Cornerstone Investment Partners, Featured, Small Cap Market Review

Weekly Small Cap Market Review: July 17 – July 21

Weekly Small Cap Market Review: July 17 – July 21

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

The Tour de France was won handily by Chris Froome, and he drank champagne (a rosé, by the way) on the road to Paris. As written last week, his team got him to Saturday, with the final mountain stages in the Alps all but locking it in.

But I want to talk about Jordan Spieth. He’s good. He’s really good. He’s still not Tiger Woods level of stability, who won almost a quarter of all events he entered and has missed only 8 cuts more than Spieth has (28 vs. 20) in a career that started when Jordan was still in nursery school. As you probably know, he won The Open in a thrilling finish, but it included a hole, number 13, that likely would have wrecked most players. On this drive, Spieth hit a duffer’s slice almost a hundred yards into the rough onto a 45 degree angled hill covered in thick gorse. However, instead of trying to hit it from there, he used a mastery of the rule book to end up with a clean shot off the practice range, and only bogeyed the hole. How did he do it (hat tip to Business Insider for this analysis)? First, he took an unplayable lie, which enabled him to bring the ball back along the line as far as he wanted, no closer to the hole. That gets him from the hill to the practice range (which is in-bounds due to a quirky local rule at Royal Birkdale). However, his shot was blocked by the club manufacturer’s trucks, massive RVs placed there because, you know, who would have ever thought someone would hit a shot anywhere near them! Now, he gets to apply the rule regarding temporary immovable obstructions, which gives him the ability to position the shot at a better angle as long as it is no closer to the hole. But since he’s 30 feet or so below the hill separating the 13th hole from the practice range, it’s a completely blind shot. He asks his caddie to stand on the top of the hill to give him the line, but smartly asks him to move just before taking address, since that’s yet another rule. He hit a decent shot, made bogey, and somehow pulled himself together to go five under on the next four holes to end Atlanta’s own Matt Kuchar’s chance at his first major.

Other than how amazing the sequence of events was, and how much free advertising Spieth’s sponsor got for 15 extra minutes of airtime focused on him, there were a few things that stuck out. First, as we discussed, is his knowledge of the rule book. It’s not just knowing the rules to avoid making a mistake (in high school golf, an opponent was penalized two strokes for forgetting to take out the flag when putting in), but knowing how to use them like a matrix and apply them together as appropriate. When investing, we often get so focused on one fact that we forget how it all fits into the bigger picture. Second, and more important, is his ability to bounce back. I assume I was not the only one who got images of Augusta when he hit that shot, that the tournament was already over in his head. Instead, he settled down, considered his options logically, hit a good shot, finished the hole, and moved on. At best, investors get it right slightly more than half of the time. There’s no way to not make a mistake, so just know it’s a long round and there will be opportunities to recover.

The small cap market, as defined by the Russell 2000 Index, was up 0.5% overall during the week. The market was up, but sentiment felt somewhat different, with skepticism related to Washington’s ability to execute on its legislative agenda shifted attention to a combination of rate plays (i.e. utilities, telecom) and growth trades (i.e. tech) at the same time. Questions around inflation hurt the commodity-linked names and financials felt the impact of treasury strength. Utilities (+4.3%, up on rates and the Avista takeout), Consumer Staples (+2.5%), and Telecommunications Services (+2.3%) were the strongest sectors in the Index. Energy (-2.2%), Materials (-0.1%), and Financials (-0.1%) were the weakest. Overall, small caps were in line with large caps as the Russell 1000 Index was up 0.6%. Among small caps, growth and value were in line, with the Russell 2000 Growth Index and Russell 2000 Value Index both returning 50 basis points for the week.


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