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One asset class has rebounded to new all-time highs — U.S. small cap stocks.
Comparison of S&P 500, Russell 2000, Emerging Markets and Int'l Developed Indices

After a bullish 2017 and hopes of a continued global equity melt up, 2018 has instead reintroduced market volatility. Despite global market volatility, U.S. small cap stocks have rebounded to new all-time highs.

Factors influencing the success of U.S. small cap stocks

So what factors has caused this success versus larger capitalization stocks?

I’m not sure Yogi Berra is big source of investment knowledge for most investors. But, that doesn’t mean his words of wisdom, “déjà vu all over again,” don’t apply.

Today’s Wall Street Journal included an article titled, “Value Investors Face Existential Crisis After Long Market Rally.” It discussed the “rut” that value investing has experienced since 2009.  No arguments there. Value stocks are down about 1% year-to-date while growth stocks are up nearly 8%.  The tech-heavy NASDAQ Composite Index, which holds many of the favorite tech names among growth investors, is at its all-time high.

A Familiar Scenario

But as I sipped my morning coffee and read further, I didn’t ask myself how we should change our current value approach (for the portion of our portfolios dedicated to value investing) to match the current environment.  Instead, I found myself thinking about earlier in my career, the late 1990s.  Tech ruled the day from 1995 through 1999, and value investors lagged back then too.

I was watching CNBC this morning and the interviewer began the interview with the two portfolio managers invited onto the show and the interviewer lead into the segment with the following question which then became the initial banner for the viewing public; ”election years;  steeped in market uncertainty, will the market be down?

ONEIL 5.27

I thought the two guests on the show did an admirable job of answering the interviewers questions, but it provided to me a crystal clear contrast on the differences between the investment professionals goals and the goals of the interviewer; The investment professionals were attempting to educate the viewers to their firms unique investment philosophies on a macro level basis, where the media personality was trying to gain additional viewership.”  There is nothing wrong either side’s points of view as they were just doing their job, but one needs to understand what their respective goals are and act accordingly. 

Investors have surely noticed the recent volatility in the global market place. In the first few weeks of 2016, we have experienced very volatile markets both domestically and internationally. The catalysts of the global sell off have been the volatility experienced in the Chinese markets and the plunging price of oil.

On top of the China’s current economic issues, devaluation of the yuan has added angst around the globe. Although China’s economy is the second largest in the world, its stock market represents a fraction of the global equities market. Investors need to remember that China equity falls are more correlated with short-term psychological factors rather than the underlying China economic conditions.

Kersting Blog 01.20.16. USE

4-day selloffs for Janiczek Wealth Management Blog
Beginning August 20th, the S&P 500 declined over 10% in 4 trading days. While a 10% drop is the unofficial definition of a typical correction, the speed at which the decline came was rare. In fact, since 1965 there have only been 5 other “events” that included a 10% correction in just 4 trading days: 1987, 1998, 2002, 2008, and 2011.

We examined those past events to see what we could learn. The accompanying chart shows the last 5 events 3 months before and 3 months after their 4-day drop. Our first takeaway?

In 4 of the 5 historical events, the S&P 500 showed gains 3 months later, while 1 event (2008) led to deeper losses. Last week, we heard many market pundits point to data like this to encourage investors that a rebound was likely.

Scales-of-Justice - Janiczek

 

I’ve had a lot of clients and friends recently ask me if our comprehensive “bear watch” or “rally watch” investment models have triggered any sell or buy signals. The short answer is…

  • the weight of our macro, fundamental and technical evidence remains bullish,
  • albeit with signs of elevated risk across global markets.

With plenty of headlines and moving economic parts to consider, I do think it’s a good time for you to review our mid-year market outlook. Click the image below to download.

Portfolio Matters

In the 5-page report, our Chief Investment Officer, James Callahan, CFA does a fine job filtering through all the noise, hype and data to zero into a quality evidence-based assessment of conditions, dangers and opportunities.

As always, if you have any questions, feel free to call me at 303-721-7000.

graphWe’ve all been told before that “history doesn’t repeat itself, but it rhymes,” and “those who cannot remember the past are doomed to repeat it”.

In the investment world, there’s a lot of truth in those quotes. The economy, the business cycle, and the markets all have observable patterns: expansions & recessions, growth and decline, bulls and bears.

For example, much has been said about the so-called Shiller P/E ratio, which values today’s price relative to a 10-year earnings average.


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