There is an infuriating Facebook meme going around recently called "10 Concerts." The premise is simple: like the old bar icebreaker "Two Truths and a Lie," people list 10 concerts, 9 of which they actually attended, and one which they did not. Putting aside the bigger issue about why people seem to be drawn to flaunting how "good" their tastes are and much money they have spent on entertainment, it reminded me of how much work we as investors do to separate the truths from the lies. While there are unfortunately many examples of actual lies in the investing world and stock market, you are much more likely to be faced with self-advantageous half-truths and subjective judgment (I took a whole accounting class called "Problems in Financial Reporting" at Wharton) from companies, and irrelevant or biased opinions from other players in the market. Like Nate Silver's great book "The Signal and the Noise," explains, the world is filled with imperfect information, and any new data point should be considered in the context of its source's relevance, accuracy, and reliability.
It's a different balance in small caps versus large caps. In small caps, there is less information out there, which, in theory, means there's less noise. Fewer Wall Street analysts cover the companies, fewer news outlets care what they do, and customers or suppliers don't talk about them as much. However, there are also fewer checks on companies' often rosy views of themselves. In large cap, there can be effectively infinite noise (there are 11.8bn hits for "Google" on, well, Google). But there are almost 50 teams of people whose profession is to tell you what they think of Google, and thousands of investors, of all sizes, intelligence, and skill levels, who tell you the same thing with their wallet, buying and selling it every day. Which is better? At the end of the day, it's tough to fight through the noise to find the signal, but no one ever said this was easy.
The small cap market, as defined by the Russell 2000 Index, was up 1.5% overall during the week, continuing recent strength. Large cap earnings have so far been quite strong, with growth of over 12%, versus consensus of 9%. With the new tax plan pushing expectations for growth up, as well as a potential re-set on a repeal of health care, Health Care (+4.0%, with biotech up over 5.5%), Telecommunication Services (+3.0%), Materials (+2.5%), and Industrials (+2.4%) were the strongest performers. Real Estate (-2.1%) and Utilities (-0.1%) were weaker on the Trump trade, with Energy (-0.5%) continuing its declines. In total, small caps performed roughly in-line with large caps, as the Russell 2000 Index and the Russell 1000 Index were both up approximately 1.5%. Among small caps, the Russell 2000 Growth Index beat the Russell 2000 Value Index by approximately 110 basis points due to the strength of biotech and information technology.
This week will include a wide range of data (up to you to determine what is noise and what isn't!), from more large and small cap earnings, a Fed meeting, and jobs numbers.
As a big Billy Joel fan, my favorite anti-meme of "10 Concerts" was the following from a friend of mine in the advertising industry: "9 things that occurred during the 20th century and 1 that did not." I can get behind this one.
- The King and I
- The Catcher in the Rye
- England got a new Queen
- Santayana (goodbye)
- We started the fire
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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