Weekly Small Cap Market Review: November 27 – December 1
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
Recently, I attended the Charles Schwab IMPACT conference in Chicago with the AdvisorShares team to talk with advisors around the country about how active and passive ETFs were everywhere. One of the key things I heard, whether at presentations or just on the floor, was the sheer proliferation of products available. Advisors can build or supplement a portfolio with pretty much anything these days – specific industries, factors, styles, asset classes, geographies, or ESG/SRI approaches. They can be an incredibly powerful tool (I am, of course, biased).
But the growth of passive and semi-passive vehicles can also lead to the types of see-saw sector rotations we’ve seen over the past two weeks or so. You don’t need to do the hard work to find the best regional bank if you are really betting on the 2-10 spread or regulatory changes, so instead you just buy all of them, and then sell them all just as quickly when the 2-10 relationship flattens again. It can work, but is it the best approach over the long run? Markets change quickly, but companies change slowly, and when you only focus on the market, you can miss out on the good companies thrown out with the bad ones. All indices are made up of individual companies, so even if it seems right to be fast, try to invest slow.
The week was dominated by discussions in Washington around the potential tax bill after it moved to the Senate, and it eventually passed very early Saturday morning. The process couldn’t advance without significant horse-trading among senators, so while reconciliation between the House and Senate bills will be detail-oriented, the market got much more confident incorporating its potential effects in their models. It remains to be seen whether the bill’s effects, on the corporate side at least, will generate significant long-term growth in addition to the expected short-term bump in profitability and share buybacks, but we saw a significant rotation into domestic-exposed industries, such as Financials, Consumer, Telecom, and Industrials. Most of this came out of Information Technology, which is a crowded trade, and also experienced questions around the semiconductor space. Outside of the investor rotation, the U.S. economy continues to appear strong, with Q3 GDP revised upwards to 3.3%, new home sales hitting a ten-year high, and holiday spend expected to grow faster than in recent years. Intraday movements were at times wild, with the market reacting to the confirmation hearing of Jerome Powell for Fed Chairman (although generally uneventful) and the news that former National Security Advisor Michael Flynn would plead guilty and cooperate with Special Counsel Robert Mueller on its investigation.
The small cap market, as defined by the Russell 2000 Index, was up 1.2% overall during the week. Consumer Staples (+4.9%), Energy (+3.6%), and Financials (+3.4%) were the strongest sectors in the Index. Information Technology (-3.1%), Real Estate (-0.7%), and Materials (+0.7%) were the weakest. On a style basis, small caps underperformed large caps, as the Russell 1000 Index was up 1.5%. Among small caps, value outperformed growth, as the Russell 2000 Growth Index returned approximately 150bp less than the Russell 2000 Value Index.
The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.