Opus News & Insights

Review of U.S. Small Caps - September 2017
Friday, October 6, 2017

Key Points
  • The momentum continued from late August into September due to President Trump releasing his framework for tax reform, coupled with increased speculation of a cash repatriation component that could spur M&A activity. Both of these factors benefit U.S. small caps. Since August 21st, small caps are up 10.1%, besting U.S. large caps by over 6.1% during this period.
  • For September, U.S. small caps were pushed to all-time highs, returning 6.2%and outperforming U.S. large caps' return of 2.1%. September is only the second month this year that small caps have materially outperformed large caps as the latter has still yet to finish a month in negative territory. For the year, large caps retain their lead over small caps, outperforming by 3.3%, a figure that was as high as 7.5% at the end of last month.
  • The Russell 2000 Index (R2K) trades at 21.3x forward P/E, which is a 13%premium to large caps. This is the most expensive that the R2K has been since 2001 when earnings were at a trough. Despite lagging for the year, the Russell 2000 Value Index (R2KV) trades at 18.7x forward earnings, well above its historical average, and is trading at levels not seen since the beginning of the year. The Russell 2000 Growth Index (R2KG) trades at 22.6x.
  • For the first time since June and only the second time all year, Value beat Growth. This victory was due to the premise that lower taxes will aid the more economically sensitive sectors, along with better growth boosting interest rates, benefiting Financials, a perpetual overweight in Value. Since August 21st, the highest tax bracket of stocks are up 11.8%. For the year, Growth continues to have a commanding lead against Value, outperforming by 11.1%.
  • Just one month after Energy recorded its largest monthly drop for the year at -10.9%, the sector rallied 15.6% in September due to higher oil prices. Energy continues to be the worst performing sector within the R2KV, down 22.6% for the year. Health Care continued to outperform, now up 30.4% for the year. Interest rate sensitive areas, i.e., Utilities and REITs, took a breather as rates moved higher. Consequently, banks rocketed forward, returning 10.3% for the month, significantly contributing to Value's defeat of Growth.
  • The market rally favored non-earners, non-yielders, and the slowest growers, a common theme during the third quarter. The market was also led by the smallest names as small cap ETFs saw $2.7B in inflows during the month, totaling $7.6B for the year,well ahead of last year's figures.
  • Year-to-date, only 20.5% of small cap core managers are outperforming their relative benchmarks. Value and Growth managers have fared slightly better with 40.0% and 47.9% outperforming, respectively.
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