Eq: Small Caps
(New York)
Most investors had their eyes on growth, particularly in the rebound of the pandemic, but things are starting to look good for value stocks. Investors at Columbia Threadneedle Investments said that stimulus from the Fed and Government put investors' value metrics on pause, but as the economy continues to normalize and rates rise, value stocks will be the beneficiaries. Companies like Citizens Financial Group Inc., United Community Banks Inc., and Sunstone Hotel Investor Inc. are all small-cap value companies that Tugman of Columbia Thread Needle finds attractive. P/E ratios are better for small and mid-cap value stocks, and are trading at heavy discounts compared to the broad S&P.
FINSUM: As life returns to normal stocks might do the same, which would be a return of value investing and attractive price-to-earnings ratios.
(New York)
Small caps have had a great run since the market’s bottom in March. The IWM ETF, which is the market’s effective benchmark for small cap performance has had an astonishing year. Since October alone IWM has returned 35%. If you look since the beginning of March, the return is over 100%. Many would be okay with earning that in almost a decade! With that in mind, some contend that it is time to take profits as the asset class is priced for perfection.
FINSUM: This is an interesting and classic debate. If performance is so stellar, should you take the victory and get out, or stick with your winner? If momentum investing has taught us anything in the last half decade, it is to stick with winners. Looking more fundamentally, small caps have historically outperformed when the economy is growing, so there should be some tailwind.
(Chicago)
Small caps are looking strong, and seem likely to outperform large caps over the next year. Small caps have seen two decidedly positive trends over the last month—an outperformance relative to the S&P 500, and increasing breadth. From a technical perspective, those are both encouraging. On the fundamental front, small caps are starting to follow a well-trodden path to success. Historically, every period since 1990 in which the Russell 2000 has outperformed the S&P 500, spreads have been widening. Bond watchers will have noticed that Treasuries have risen 28-40 bp recently across different maturities. Since that rise in yields seems likely to continue because of the growing debt needs of the US government, small caps may be in for a good run.
FINSUM: We really like this logic. Small caps tend to have a higher beta to GDP, so rising yields (hopefully indicating a better economic environment) should create additional spread widening, and thus be positive and create some continued outperformance.
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(New York)
Investors are increasingly betting on a blue wave. More interestingly, the market’s calculus for what that blue wave to could mean to stock prices and the economy is changing. For much of this election cycle, a sweep by the Democrats was seen as a negative for the economy versus the status quo. However, in recent weeks investors have been shifting the other way—seeing a blue wave as a win for the economy. The reason why has to do with infrastructure spending and bigger and longer-term stimulus packages. While the possibility for this has been hurting Treasury prices because of the likely increased debt load, it also means that both infrastructure stocks and small caps seem poised to gain as we approach the election and well after it.
FINSUM: Small caps have just recently started to outperform their large cap cousins, a sign of the shift in perspective. Infrastructure stocks seem a good bet because no matter who wins the election there will probably be some deal on that front.
(Chicago)
Small cap prices usually expand and contract more quickly than large caps do. This happens both in downturns and upswings. However, in this coronavirus rally, that has not held up, as small caps are faltering while their larger peers soar. For instance, the Russell 2000 is trailing the Russell 1000 so far this year. “This latest rally is very much a capitalization story — the big players were the ones that held their own”, says SEI investments. Another portfolio manager added “The secular growth force that comes from mega-cap tech stocks doesn’t appear to be replicable in the rest of the market”.
FINSUM: Small caps tend to lack the scale that would allow them to thrive even as the economy falls, which means there haven’t been as many winners as there were in large caps.
(Chicago)
All the market focus has been on the Dow, but small caps beat the bigger index into a bear market. Even before the big falls of the last few days, the Russell was down 25%. Small companies account for about half of US economic activity and tend to feel the strongest effects when the economy falls, explaining the sharp decline. However, small caps also tend to outperform in the three months after such falls, as they also disproportionately benefit from an economic recovery.
FINSUM: Small caps were trading at all time highs right before this plunge, and as this situation begins to clear, it seems like a very good buying opportunity.