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Weekly Small Cap Market Review: February 27 – March 3

By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)

A close college friend is getting married in May, and I traveled to New Orleans this weekend for his bachelor party. As the only investor in a group otherwise made up of much smarter doctors, writers, and musicians, I was asked how investors think about picking stocks for a portfolio. We were on Frenchman Street, listening to some great music, so I used jazz as a metaphor (pardon me if this echoes Baldwin's 'Shadow and Act' too much). For the more classically-inclined, an orchestra is the same idea. A jazz band is made up of a collection of different instruments and players. Sometimes they play together, and hit a harmony that can blow the doors off. However, at the same time, each is playing his or her own piece, with individual riffs and improvisations. The beauty of jazz is in that improvisation, that the same band is likely to play the same piece differently tomorrow to respond best to each audience. So it is with investing - A good diversified portfolio reflects the balancing act between the harmonies (the market risk) of the portfolio and the improvisations of individual stocks (the idiosyncratic risk), and the need to adjust it in a way that best responds to the market as a whole.

The small cap market, as defined by the Russell 2000 Index, was flat overall during the week in highly volatile trading (first time the Russell 2000 Index had three 100bp moves in a row since the election). Donald Trump spoke to a session of Congress on Tuesday and while investors reacted positively on Wednesday in response to his more measured tone and policy endorsement initially, a lack of policy specifics and significantly increased expectations for a March rate hike (up from 50% to 80% likelihood, driven by stronger customer and producer confidence) supported relative strength in large cap stocks (Russell 1000 Index) versus small cap stocks (Russell 2000 Index), up this week by 65 basis points. Among small caps, however, Growth significantly outperformed, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by around 100bps, but almost 2/3 of this was driven by the Growth index's healthcare exposure.

Within the Index, Health Care (+3.1%) was the strongest performer as biotechs and pharma ran on Trump's statements suggesting regulation will be softened. Materials (+1.2%) and Industrials (+0.3%) were also up, as economically-sensitive and inflation-driven sectors were also buoyed by the speech. On the downside, Telecommunication Services (-2.4%) and Energy (-2.0%) were the weakest.

Earnings season continues, and with almost 80% of the Russell 2000 out so far, companies are reporting decent Q4 results, with around 60% beating Wall Street revenue estimates and around 65% beating on the profit line. Looking forward, however, estimates for next quarter remain weak, with over half of Q1 estimates going down due to guidance or other factors. Given high valuations, it is important to consider how reduced growth expectations will affect performance.

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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.

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 http://AdvisorShares.com . AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by 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.