Should You Worry About Small Cap And Financials Weakness?
Michael Gouvalaris | May 25, 2017 11:16AM ET
One of the themes this year has been the relative under-performance of the Russell 2000 index, which is comprised of small-cap stocks that generate almost all of their revenues domestically.
The chart above shows IWM year-to-date performance, struggling to stay above the break-even level while the S&P 500 is up close to 8.5% in that same time frame.
In the same manner, XLF have also struggled to stay positive year to date, showing similar relative weakness.
Financials make up 14.1% of the S&P 500. So is this combined weakness in small caps and financials a threat to the advance?
We know that there is always going to be something to be concerned about. Investors waiting for the perfect moment will be waiting forever and end up paying high prices whenever they do decide to jump in. That said, I think the answer to this question is simply choosing too small of a time frame.
If we look at a one-year time frame, we see that there is in fact relative strength in the Russell 2000, outperforming the S&P 500 by almost 6 percentage points.
The same is true with the financials. A one-year time frame shows relative strength, with the sector outperforming the S&P 500 by about 5 percentage points.
This of course doesn’t mean we couldn’t suffer a correction. My point is that there is no need to make any serious portfolio changes based on five months of trading. A simple change in perspective can make a lot of difference.
The stock market has been advancing due to better earnings and global GDP growth. The earnings growth for the S&P 500 came in at 13.9% for the 1st quarter, which is the highest growth rate since Q3 2011.
Much of the up rally probably had little to do with politics. So it’s no surprise that the market has so far been able to ignore the recent headlines.
Source: Factset
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