Are Small-Caps Getting Back to Normal?

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Royce's Charlie Dreifus recently remarked that in 2017 January exhibited a familiar tendency in which the fourth quarter's winners wind up being the inaugural month's worst performers while the that same quarter's worst performers become January's best.

Our friends at Furey Research Partners lent further support to Charlie's observation, developing a three-columned heat map of selected equity sectors, industries, and factors that showed performance in 2015, 2016, and YTD 2017.

Certain areas that were negative in 2015 came back strong in 2016 but have taken small steps back so far this year, including Energy stocks. Conversely, big winners from 2015 that suffered through 2016—the biopharma complex as well as the Health Care sector as a whole—have recovered a bit so far this year.

Even more interesting to us, however, was the behavior of a few key areas in which many of our portfolios have significant investments.

Both the semiconductor industry and the overall Information Technology sector were positive for all three periods while Industrials and Materials were down in 2015, rebounded in 2016, and have stayed positive so far in 2017.

Financials showed the mirror image of that last pattern: They were up in 2015 and 2016 before correcting slightly in the early part of this year.

One year after hitting a trough on 2/11/16, small-caps are seeing a similar trend. For example, 2017 has so far seen a breather for the Russell 2000 Value Index and a bounce back for the Russell 2000 Growth—the precise opposite (on a much smaller scale) of what we saw in 2016. In other words, it looks a little like 2016's third quarter in miniature.

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