By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)
I recently read a college classmate's book, "Cork Dork," which uses her experience learning how to be a sommelier to more broadly explore the world of wine (both high-brow and low-brow), the meaning of taste, and the social construct built around it (people enjoy wine more when they know it is more expensive). Looking at it more objectively (if it is possible), wine is chemically among the most complicated foods we ingest, which helps to explain why two glasses of the same basic liquid can taste so different from each other, and the same exact glass can taste so different to two different people.
I think it is this complexity that attracts so many people in our industry to wine. We spend our days poring over numbers, and analyzing management teams and business models to try and understand what can make two companies in the same industry so different. Both wine and stocks are, at their cores, quite simple - wine is just fermented grape juice, and the value of any asset is just the sum of expected cash flows and the likelihood of receiving them. Yet on both wine and stocks, we will never agree, so we just keep educating ourselves and honing our skills.
The small cap market, as defined by the Russell 2000 Index, was up 1.2% overall during the week. Thursday was expected to be the big day in the market one way or another, with an ECB meeting, the UK parliamentary election, and former FBI director James Comey's testimony. The ECB meeting went as was expected, and the backfire move by the UK Conservatives may have softened the Brexit process, but didn't change it. The market took the lack of a truly bombshell statement during Comey's testimony and the upcoming FOMC meeting to rotate towards some recently-weak sectors, particularly financials, and away from red-hot information technology.
Financials (+4.9%, with banks up strong on improving yields in advance of this week's FOMC meeting), Materials (+1.9%, with metals and forest products driving), and Real Estate (+1.7%) were the strongest sectors in the Index. Information Technology (-0.9%, with the majority coming from the sudden sell-off on Friday) and Utilities (-0.5%, due to the inverse of the reflation trade) were the weakest. In total, small caps outperformed large caps as the Russell 2000 Index returned around 150 basis points more than the Russell 1000 Index (down 0.3%), mostly due to fewer and stronger IT names, as well as more exposure to regional banks. Among small caps, value outperformed growth by almost 250 basis points, again due to the Financial/IT divergence during the week.
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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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