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Opus News & Insights

Review of U.S. Small Cap Value November 2016
Tuesday, December 6, 2016

Key Takeaways
  • After taking it on the chin in October, U.S. small cap equities rose 11.2% in November, extending their year-to-date lead against the S&P 500 by 8.2%. Small caps have outperformed large caps in five (5) of the last six (6) months. Strong performance in November was driven by higher interest rates and the potential for an inflation pick up, which propelled the U.S. dollar higher. A strengthening dollar has historically boded well for small cap performance. The Russell 2000 (R2K) is now trading over 20x forward P/E, which is a level not seen since 2001. Though no new tax policy is for certain with a Trump presidency, hypothetically, if corporate taxes were cut to 22%, small caps would sport a forward P/E of 16.9x, which is still well above long-term historical averages. Small caps reached an all-time high on November 25th, right before December, a month that has historically had strong performance.
  • For 2016, the Russell 2000 Value Index (R2KV) has outperformed the Russell 2000 Growth Index (R2KG) in eight (8) of the first eleven (11) months, with November having the largest outperformance this year. Value outpaced Growth by 4.3% for the month. In November, the R2KV's overweight in banks boosted performance with increased speculation of the Federal Reserve raising rates for the first time in a year. The R2KV has over 19% more exposure to banks than the R2KG. For the year, the R2KV continues its dominating lead over the R2KG by 16.7% even though Value lagged Growth from February 11th until September 30th.
  • November's performance was bolstered by the likely candidates; Energy, Materials & Processing and Banks. For only the second time this year, every sector posted a postive return in November. Sectors that performed relatively poorly were those that are sensitive to higher interest rates, i.e., REITs and Utilities. Over the last five months, Energy has been either one of the top performing sectors or the worst performing sector during the given period. For the past four months, if Energy's return has been positive, the market's return has also been positive, and vice-versa. Though Energy is a nominal weighting within small caps, it has fueled investor sentiment that has continued to drive many sectors that have an indirect exposure to oil. For the year, Materials & Processing continues its dominating lead, while Energy jumped to the second best performing sector for the year during November.
  • The R2KV continued its theme for the year of favoring lower quality stocks with an emphasis on companies that do not have any earnings.
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