Opus News & Insights

Review of Small Caps - February 2018
Tuesday, March 6, 2018

Key Points
  • After its strongest start to a year since 1989, the market quickly reversed in February, as the potential of four rate hikes became the easy scapegoat. With this, the VIX catapulted to an intraday high of 50.0, ultimately reverting back to its historical average of 19.0, as investors learned that volatility was being suppressed by inverse VIX ETFs. February ended the S&P 500's streak of closing positive for 15 consecutive months, a statistic not seen since 1981.
  • At the beginning of 2017, there was a large reversal in themes relative to the prior year. Conversely, this year, has continued to see last year's themes work in both January and February, i.e., U.S. large beating U.S. small and Growth over Value. Common conception is that rising interest rates tend to bode better for small than large, but this did not pan out in February, as the S&P 500 has now outperformed the Russell 2000 Index (R2K) for five straight months. After a dominating performance last year, Growth, which outperformed Value by 14.4%, continued its market leadership, besting Value by 4.7% year-to-date.
  • With analysts updating estimates to reflect tax-reform, growth expectations have begun to rise, leading to decreasing valuations within small caps. With weaker relative performance and strong revisions, the R2K now trades at a discount to the S&P 500, below its historical 5% valuation premium. The R2K trades at a forward P/E of 17.2x, its lowest level since April 2016.
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