Weekly Small Cap Market Review: September 11 – September 15
By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
Bitcoin! Undoubtedly, you have heard or read that it’s either the future of exchange or the next tulip bulb bubble. However, with all the discussion of bitcoin’s highly volatile value, few people really understand it.
Simply put, there are two levels to the bitcoin world. At the base of all of it is a technology called blockchain. A blockchain is a decentralized, distributed database that acts like a general ledger, automatically, efficiently, and securely recording transactions. Imagine a shared document like a spreadsheet, except every change and action is tracked and linked to the time and person who made the change.
The applications for this are wide-reaching. Smart contracts, frictionless trading, medical records, and secure transactions are but a few. Another application is a decentralized and secure means of exchange. This how you get to bitcoin, ether, and the myriad of new cryptocurrencies popping up daily. Effectively, bitcoin is a digital version of the “Where’s George” meme from the late ‘90s. Imagine a dollar bill, but every time it is used, someone writes the name of the new owner and when it was used. Originally designed as a means of exchange independent of governments, many have now ascribed commodity-like characteristics to it as well.
I’m still not sure whether it has any actual value. The US dollar has no direct asset value since the gold standard was abolished, and instead has value because it is backed by the full faith and credit of the U.S. government. Bitcoin, ether, and others have no commodity or organization backing them up, by definition. So their values are based solely on whether people ascribe value to them, and whether they can be freely exchanged for another good or service. Much of the volatility in valuations has come when there are questions about cryptocurrency legality (i.e. China blocking ICOs) or liquidity (i.e. a bitcoin exchange gets hacked). Additionally, the ability to actually pay for things using bitcoin often remains limited or more complex than it’s worth.
Bitcoin and other cryptocurrencies may yet be on the long list of bubbles that have hit investors for hundreds of years, whether Pets.com, tulip bulbs or investments in the South Sea company. It may not be, and we are at the cusp of a sea change in how we transfer assets. However, even if one application of blockchain is a bubble, that doesn’t mean the underlying technology can’t be used.
The small cap market, as defined by the Russell 2000 Index, was up 2.3% overall during the week. Energy (+8.7%), Financials (+4.2%), and Consumer Discretionary (+3.1%) were the strongest sectors in the Index, as oil prices rose over 5% to close near $50 for the first time in over a month, Treasury yields increased, there was a better-than-expected outcome from Hurricane Irma, and inflation data continued to be positive. Utilities (+0.3%), Health Care (+0.2%), and Real Estate (+0.8%) were the weakest with the inverse effect of yields and weakness in biotechs.
On a style basis, small caps outperformed large caps, as the Russell 1000 Index was up 1.7%. Among small caps, value outperformed growth, with the Russell 2000 Growth Index returning around 125 basis points less than the Russell 2000 Value Index for the week.
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