Weekly Small Cap Market Review: March 27 – March 31
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
I was on a quick cross-country trip last week – the kind of trip during which you spend more hours on a plane than you do in meetings – and so somewhere over Kansas, I had a little downtime to watch a movie. I turned on Arrival, which, as far as sci-fi action flicks go, is heavy on the sci-fi and light on the action. Also, it’s strange to watch Jeremy Renner play someone with a Ph.D. I know he’s had a wide-ranging career and all, so maybe it’s my lack of imagination, but I will always see him as Southie bank robber Jem Coughlin from The Town. Putting questionable casting aside, one of the key topics the film addresses is how language affects our perception of the world (also addressed in the great Star Trek: TNG episode “Darmok”). The aliens speak a language that reflects their different concept of time. Without considering that core difference, the scientists would not have been able to begin to comprehend how to translate the alien language.
It can be the same with picking stocks. Representativeness bias suggests that investors naturally place stocks into pre-existing buckets, like “growth” or “value,” and compare performance to stocks in the same bucket. For example, a “growth” stock that is expected to grow earnings at 3% for the next few years will perform worse than a “value” stock that is expected to do the same, regardless of their current multiples. Most companies have periods of time when they are either or both, and if you do not consider stocks on their own merits rather than a preconceived notion, you can miss many opportunities.
In less nerdy, but no less geeky news, it’s Masters Week, the only thing that makes up for Atlanta’s spring pollen season. While I will unfortunately not be a patron in 2017 after three lucky years in a row on the grounds, I can already hear the CBS piano music “Augusta,” (Trivia: it was written by Kenny Loggins’ third cousin and actually has lyrics), Jim Nantz’s voice, and the birds chirping on one of the world’s most beautiful and difficult courses.
In an almost direct reversal from last week, the small cap market, as defined by the Russell 2000 Index, was up 2.4% overall during the week, with Utilities the weakest performer. Small cap outperformed large cap, with the Russell 2000 Index outperforming the Russell 1000 Index by around 150bps. Among small caps, value was strong, with the Russell 2000 Value Index beating the Russell 2000 Growth Index by around 70bps. The shifting of legislative priorities to tax reform (and, potentially infrastructure shortly after) has allowed the resilience theme to pick back up again, with value and cyclicals responding positively, and commodities and the dollar also performing well. While consumer confidence is at 2000 levels, the divergence between sentiment-driven (“soft”) and economic results (“hard”) does indicate a need to focus closely on actual results. Within the Index, Energy (+7.2%), Materials (+3.0%) and Financials (+3.0%) were the strongest performers, with Utilities (+0.7%) and Telecommunications Services (+1.2%) weak on the reversal of the STUB trade.