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Opus News & Insights

Review of U.S. Small Caps - January 2017
Monday, February 13, 2017

Key Takeaways
  • After a year of strong absolute returns and increased momentum heading into the new year, U.S. small caps had to rally on the last trading day of the month to pull performance into the black. After small caps outperformed U.S. large caps in nine (9) months last year, January proved to be the turning of the tide as large caps outperformed small caps by 1.5%. The lore of the "January Effect" indicates that a weak January, when large caps beat small caps, leads to the full year of weakness for small caps.Historically, when small caps beat large caps by more than 5% in a year,they tend to relatively lag the following year. Small caps are trading at a 15% premium to large caps, which historically, have traded at a 4% premium to small cap. This is quite a jump as the valuation spread was only 11% at the beginning of the year, but increased due to lower expected earnings growth within small caps.
  • For 2016, the Russell 2000 Value Index (R2KV) outperformed the Russell 2000 Growth Index (R2KG) in nine (9) of twelve (12)months, with a total outperformance of 20.4%! This was the largest victory by Value since 2001 when the "Tech Bubble" burst.January was littered with numerous trend reversals when compared to 2016. First, Value slowed its momentum with the R2KGoutpacing the R2KV by 2.3%. Also reversing its trend, biotechs propelled Health Care's performance in January after posting a negative 22% return last year. Growth was also a beneficiary of the fastest growers, which rebounded after an abysmal 2016.Finally, when Value wins by such a large margin against Growth in the previous year, it tends to keep the momentum going forward into the new year, another trend that was not supported in January.
  • Continuing it momentum from 2016, Materials & Processing was the best performing sector within the R2KV for January, driven higher by increasing metal prices. Banks pulled back during the month as investor skepticism grew that only portions of Dodd-Frank may be repealed. Energy, a strong overall performer in 2016, also declined with skepticism that the OPEC production cut will not hold up over the long term.
  • After seeing inflows of over $17.5B last year, small-cap ETF flows continued their momentum as we saw another staggering in flow of $3B in January. Counterintuitively, the largest market cap names outperformed in the month. The biggest winners for the month were non-earners, due to the outperformance in biotechs, and the fastest growers, which helped Growth beat Value.
  • Active management saw a turnaround in January after a dreadful 2016. Almost 50% of core managers outperformed the benchmark, with Value and Growth managers faring much better. Growth led the charge with 73% of managers beating the benchmark while Value managers were not far behind, posting a 67% figure.
  • Fourth quarter earnings season has started off sluggishly for small caps as the Street now expects anemic sales growth of 1.4%and profits to be down -0.5%.
  • Since Election Day, the CBOE Volatility Index (VIX) declined over 50%, the largest 12-week decline in its history.
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    • 04/12/2017 - MicroCap Value Strategy Using
    • 04/10/2017 - Review of U.S. Small Caps - Ma
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