Weekly Small-Cap Market Review: January 30 To February 3

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Includes: BXUB, BXUC, EPS, IVV, IWM, LLSC, LLSP, RSP, RWL, RWM, RYARX, RYRSX, SCAP, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SRTY, SSO, TALL, TNA, TWM, TWOK, TZA, UPRO, URTY, UWM, VFINX, VOO, VTWO
by: AdvisorShares

Summary

With another busy week, the small cap market, as defined by the Russell 2000 Index, was up 0.5% overall, but had two wildly divergent days of performance.

Within the index, health care (+3.1%) led the charge this week after key pharmaceutical executives met with the president.

Politics will likely continue to have a meaningful impact on market performance for the foreseeable future.

By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF

I write to you from Atlanta, a deflated city. If you shut off the television last Sunday night right after Lady Gaga's drone-assisted halftime show (with Pepsi as the sponsor, even the drones were against Atlanta), you might have been surprised to see a triumphant Tom Brady on the front page of the newspaper. My on-the-field (or on-the-bench) football career ended after freshman year of high school, but the Falcons seemed to get soft in the second half and played to not lose, versus playing to win. It just goes to show that performance can turn on a dime, and discipline is key for success in any field.

With another busy week, the small cap market, as defined by the Russell 2000 Index, was up 0.5% overall, but had two wildly divergent days of performance. Monday was down 1.3% on the uncertainty arising from the response to the immigration executive order, while Friday was up 1.5% on good jobs numbers (nonfarm payrolls up 227K versus 175K consensus) and discussion around financial deregulation (Dodd-Frank and fiduciary rule). The unemployment rate went up slightly, from 4.7% to 4.8%, but it was driven by increased participation in the workforce, a positive.

Within the index, health care (+3.1%) led the charge this week after key pharmaceutical executives met with the president. While Trump echoed his calls for lower drug prices, he suggested that his administration would reduce manufacturing regulations and increase the speed to market for new drugs. Consumer staples (+1.1%) and IT (+0.7%) also performed well, with reflation trades, on good semiconductor performance and court actions leading to potential softening on immigration reforms after a very contentious week. On the downside, energy (-1.1%) was weak from large cap corporate earnings that indicated low profitability is likely when companies report in a few weeks, and telecommunications (-2.6%) also underperformed. Small caps (Russell 2000) outperformed large caps (Russell 1000) by around 30bps, and among small caps, growth returned to the lead, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by around 65bps.

Large cap earnings season continues, and with over 50% of the S&P 500 out so far, companies continue to report strong results, with almost 80% beating on the profit line for the second quarter of growth in a row. Small cap is still early, with only around 23% of the Russell 2000 reported yet, but results have been similar, with revenues in-line and better-than-expected profits. This improved sentiment has also led Wall Street analysts to increase their EPS estimates for over two-thirds of those Russell 2000 companies already reported. According to work done by Citigroup (NYSE:C), three-fourths of the Russell 2000's return since 1990 has come from earnings growth, so these numbers are heartening.

Politics will likely continue to have a meaningful impact on market performance for the foreseeable future. The Wall Street Journal wrote a piece during the week that over half of the companies in the S&P 500 mentioned the president or his potential policies during their conference call. While executives have generally been positive in their approach, it is obvious that like the Super Bowl, there will be winners and losers in these policy debates, and it is the discipline to develop and consistently implement an investment philosophy that will drive long-term performance.

While we don't get a parade down Peachtree Road (or Street, I'm never sure), at least I can lean on the fact that the Giants beat the Patriots twice in the Super Bowl!

2017.02.08_Cornerstone with Labels

Disclaimer: 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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP). We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com.

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