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Opus News & Insights

Review of U.S. Small Caps - January 2019
Saturday, February 2, 2019

Key Points
  • The market took a page out of the George Costanza playbook, by rewarding those who did the exact opposite of what worked last year. The biggest losers of last year led the market in January, as U.S. small caps are off to their strongest start since 1987. In January, stocks that were down the most in 2018 were up 21% while those that gained the most last year only up 9.5%.
  • January was a complete 180 from last year. A true "January Effect" was in full motion with small caps outperforming U.S. large caps. Small outperformed the S&P 500 by 3.2% in January after trailing by 6.6% in 2018. Historically,a "January Effect" tends to bode well for small cap performance for the remainder of the year.
  • By the end of last year, over two-thirds of the stocks in the Russell 2000 Index (R2K) were in bear market territory. Now, 80% of stocks are above their 50-day moving average; the highest percentage in over a year. The market has seen a nice recovery, as the R2K's forward P/E level grew 6.4% from the end of the year to 19.5x. Furthermore, the Russell 2000 Value Index (R2KV) and the Russell 2000 Growth Index (R2KG) have seen multiple increases to 14.9x and 23.4x, respectively. However, there remains plenty of opportunity in finding value, as over 20% of the R2K trades below 10x, only slightly lower than last month.
  • Continuing with the opposite theme, factors which performed poorly last year outperformed by a wide margin in January. The cheapest names bounced 14.8%, fastest growers grew 11.6%, while the highest-beta also jumped 16.7%. Furthermore, companies with the highest-debt regained their footing thanks to high-yield spreads narrowing by 100 basis points.
  • One item that did not reverse relative to last year was Growth outperforming Value, though narrowly. From a sector standpoint, Value's performance was held back by weakness in Financials and Utilities, both of which are overweights relative to Growth. Moreover, Growth received a boost from Technology, an overweight in the Growth index. From a factor standpoint, Growth significantly benefited from the fastest growers outperforming the slowest growers.
  • Overall, the biggest surprise in January was the performance within Energy, which was down close to 40% last year. After last year's outperformance, Utilities took a breather as fears relating to overextended valuations increased. On the other hand, REITs outperformed. Health Care continues to prove strong with increased IPOs and M&A, along with Technology holding steady.
  • The 70%+ of managers that underperformed last year by owning the exact opposite of what it took to to outperform have started the year off strong (and probably ended with a date, an apartment, and a job with the New York Yankees). For the month,40.9% of small cap core managers outperformed their relative benchmarks, while Value and Growth managers fared better with 60.0% and 47.5% outperforming, respectively.
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