Weekly Small Cap Market Review: May 22 – May 26
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
The NBA finals start today. Just like the last two years, the Cleveland Cavaliers will play the Golden State Warriors. And just like the past six, LeBron James will be playing in it. We can get into a long discussion about just how good LeBron is, but what may be more interesting is the age-old question of “rest versus rust.” Since the Warriors swept the playoffs and the Cavs lost only one game to the Celtics (their only loss all playoffs), the teams have been sitting for ten and seven days, respectively, as long as the all-star break. And considering seven of the combined teams’ starting ten(!) made the All Star team, this is by far the longest break most of these guys have had all season.
Pundits and fans both like to discuss the topic of rest versus rust. It’s basically the idea that consistent effort and competition leads to more consistent play, and long breaks impact scoring results and team dynamics. The great former sports and entertainment site Grantland tried to analyze this multiple times (the best being a 2012 piece by Bill Barnwell), and he came up empty, concluding that rest neither hurts nor helps. Win percentages are a little better, but most big breaks come during the playoffs, and teams that sweep are usually great teams. Shooting may be a little worse, but later playoff rounds suggest teams are playing better competition. So, 1-1, and no one wins.
We think it’s a bit clearer with companies in small cap. I’ve written about this a few times, but those companies who get complacent often get passed, and so it’s important to constantly improve. Of course, it helps having LeBron or Steph on your team too!
The small cap market, as defined by the Russell 2000 Index, was up 1.1% during the week. It was a generally quiet week leading up to the holiday, with some safety trading (Utilities and Staples), but otherwise continued improvements in investor sentiment on a better Q1 GDP revision. In commodities, OPEC members announced extended production cut, but prices actually declined, as it had been clearly communicated to and reflected in the market. Information Technology (+2.8%, with broad-based support across hardware, semis, and software), Utilities (+2.7%, on the safety trade), and Consumer Staples (+1.3%) were the strongest sectors in the Index. Energy (-4.7%, as the market sold the news on the OPEC production cut extension) and Materials (+0.2%, as industrial specialties offset metals and packaging) were the weakest. In total, small caps underperformed large caps as the Russell 2000 Index returned around 35 basis points less than the Russell 1000 Index (up 1.4%). Among small caps, growth outperformed value by approximately 45 basis points.