Small Caps Acting Sheepish

in Market Commentary by

Market Digest – Week Ending 5/16

Stocks rallied early in the week, then spent most of the rest of it returning those gains. The S&P 500 finished flat for the week, but small caps once again lost ground. The Russell 2000 small cap index is now down 5% for the year and over 8% from its peak in March. The situation in Ukraine continues to evolve, but its effects on the markets were muted this week as investors struggle to understand what is happening and the potential implications. Bonds rallied on the uncertainty and interest rates tested yearly lows.

Weekly Returns:

S&P 500: 1,878 (-0.0%)
FTSE All-World ex-US: (+0.9%)
US 10 Year Treasury Yield: 2.52% (-0.10%)
Gold: $1,293 (+0.4%)
USD/EUR: $1.370 (-0.5%)

Major Events:   

  • Monday – Hillshire Brands said it would buy Pinnacle Foods for about $6.6 billion.
  • Tuesday – The EU’s Court of Justice has ruled that Google must listen, and sometimes comply, when individuals ask for links to articles or websites to be removed.
  • Tuesday – Mel Watt, the newly installed overseer of Fannie Mae and Freddie Mac,said the mortgage giants should direct their focus toward making more credit available to homeowners, a reversal from previous directives to pull back from the mortgage market.
  • Wednesday – Cisco reported quarterly results that were better than it had previously projected, and said revenue in the current period would exceed recent seasonal patterns.
  • Wednesday – The yield on the 10-year Treasury note touched 2.523% , its lowest level since Oct. 31. The yield on the 10-year German government bond fell to its lowest level in a year.
  • Thursday – The Federal Communications Commission voted Thursday to advance rules that would let broadband providers charge companies for preferential handling of Web traffic.
  • Thursday – Pinterest said it raised a $200 million investment that values it at $5 billion.
  • Friday – The U.S. Transportation Department gave General Motors a $35 million fine for failing to properly report safety problems involving millions of small cars.
  • Friday – U.S. housing starts rose 13.2% in April, ahead of expectations.
  • Friday – In India, Bharatiya Janata Party leader Narendra Modi declared a new era after his opposition bloc secured the biggest election win in 30 years

Our take:

Starting in mid-March, a number of high momentum technology and consumer facing stock experienced a significant spike in volatility. Since then, their fortunes have been mixed. Just picking a few examples, year to date, Facebook is up 6% and Tesla is up 27%, while Netflix is down 5% and Twitter is down almost 50%.

Investors seem to be treating the high flyers more on their individual merits, as opposed to buying and selling them as a group. However, since the increase in volatility began, selling pressure on the entire small cap universe (small growth especially) has remained consistent.

In our March 28 posting, we warned investors not to be complacent with extreme positions in small cap. After leading for nearly the entire bull market, small cap valuations are simply less attractive than large cap. Some of that gap has now been erased, but the theme remains.

Small cap stocks continue to lead on most big up days, but have been lagging on most down or flattish days. So if you are extremely bullish, you may still like small cap. For maximum diversification, we recommend most investors stick with a long term weight of 15-25% of US equities in small caps.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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