Continuing To Favor U.S. Large Cap Stocks Over U.S. Small Cap Stocks

With the passage of tax reform, one market segment one might believe experiences an outsized benefit to earnings is U.S small cap stocks. This certainly seems plausible due to the fact smaller companies tend to have less direct exposure to foreign revenue; therefore, likely generating most of their profits in the U.S.

Our firm exited completely the U.S. small cap space in late 2013 based on a number of factors, with one being the relative valuation of small cap stocks versus large cap stocks. Reviewing the relative valuation of small caps versus large caps based on price earnings ratios has certainly turned to favor small over large as can be seen in the chart below.

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Small Businesses Remain Highly Optimistic

Tuesday's report by NFIB on small business optimism for the month of January places the reading in the top five highest coming in at 106.9. According to NFIB the response to "Now Is A Good Time To Expand" was 32% and is the highest level for this category in the Indexes 45-year history. Today's strong NFIB report comes on the heals of a record level of optimism in 2017. NFIB President and CEO, Juanita Duggan noted,

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Enhancing Investment Results By Utilizing An Investment Mentor

In a recent article, Strong Hands - Bridging the Behavior Gap, by Pim van Vliet, PhD, a Managing Director at Robeco Institutional Asset Management, it was noted that,

"the average mutual fund investor lags a buy-and-hold strategy by -1.9%. This finding is persistent across different styles, varying from -1.3% for value investors to -3.2% for growth investors. Also 'passive' investors in market funds underperform a buy-and-hold strategy by a whopping -2.7%."

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Dow Dogs Struggle Early In 2018

The Dogs of the Dow of 2018 include two newcomers, General Electric (GE) and Procter & Gamble (PG). These two stocks made the list of top 10 dividend yielding stocks in the Dow Jones Industrial Average Index for 2018 and replaced Boeing (BA) and Caterpillar (CAT). Unfortunately the new additions are weighing down the performance of the Dow Dogs so far this year as they are the worst performing stocks out of the ten Dow Dogs year to date through Friday's market close.

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Last Week Was The Beginning Of An Equity Market Returning To Normality

Some are saying last week's market movement is one for the record books. I have seen descriptions noting the market decline was unprecedented or the market is in turmoil. S&P Dow Jones Indices Indexology Blog titled a post, I'm Exhausted, but outlines data that places the market decline in perspective. One data point in S&P's post,

"Keeping perspective, as repeatedly noted, while 1000 point declines make for frightening headlines, the percentage changes represented by those moves are not uncommon. To wit, there have been nearly 300 daily 4% or greater moves since the DJIA’s inception. Put another way, 3 of the top 10 worst point drops on record occurred during this recent spell; none of them, however, come anywhere near the worst percentage."

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A Reversal In Bullish Investment Sentiment

I have often written that sentiment measures are most valuable at their extremes. Also, they tend to be most representative of potential market turning points when the extreme is at the bearish end of the spectrum. However, in hindsight, it appears recent excessive bullishness for individual investors and institutional investors indicated a cautionary equity market outlook would have been profitable.

The first chart below represents individual investors' bullish sentiment responses as reported weekly by The American Association of Individual Investors. On January 4 of this year bullish sentiment spiked to near 60% and represents a high level for this reading. About a month later, the 8-period moving average reached near 51%, also a high level for the 8-period average, although the average has exceed 60% in the past. 

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Volatility Returns

Unwelcome, Unpleasant, Inevitable. The recent spike in volatility has certainly caught the attention of investors over the past several days and as corrections go, the market drop has been quick and sharp. 

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