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Opus News & Insights

Review of US Small Caps
Friday, July 8, 2016

Key Takeaways

  • U.S. small cap equities rose in the second quarter, reversing the losses incurred during the first quarter of 2016. Despite the Russell 2000 (R2K) being up almost 3.8% for the quarter,small caps were virtually flat for the month of June. Small Caps continue to lag behind the S&P 500 for the year, but they did gain some ground during the quarter.
  • Growth has overpowered Value over the past few years, though the trend started to reverse in the first half of 2016. Value outperformed during June, beating Growth by almost 0.8%. This lower-for-longer period of interest rates favors value due to its exposure to Utilities and REITs.
  • For the Russell 2000 Value (R2KV), dividend payers have been one of the largest contributors to performance within all of small caps not only for the month of June, but for all of 2016. For both June and 2016, slightly higher P/E and lower ROE have been in favor. Though size was not a differentiator for the month of June, larger issues have continued to perform well year-to-date.
  • Sectors that had performed well year-to-date continued to contribute the most to the R2KV return in June, led by Utilities,Materials & Processing, and Consumer Staples. Health Care has continued to be the largest laggard within Value, but not to the same extent as in the R2K due to its exposure to Biotechs, which have decreased nearly 28% YTD.
  • The Fed continued to be dovish after opting to leave interest-rate policy unchanged, as widely expected. The meeting, which took place before the Brexit vote, highlighted uncertainty surrounding the labor market following the poor May jobs reports.The May jobs report was the lowest in 17 months and the report noted that this was the lowest level of optimism since the survey began in October 2009.
  • Brexit and global volatility lowered expectations for a rate hike this year. According to futures trading on Bloomberg, there was only an 8.8% chance of a rate hike in 2016 at the end of Q2. This lower-lower-for-longer attitude propelled REITs and Utilities to be the best performers in the month of June. Surprisingly, with all the volatility that the month of June saw, the VIX index is actually below where it started the year, but the intraday fluctuations for small caps were at a five-year high.

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