I recently participated in Seeking Alpha’s year-end roundtable focusing on small capitalization stocks. Here is a link to the full interview:
What I found most interesting is how my answer to the following question differed from the consensus:
SA: Hypothesis: with trade tensions, oncoming U.S. political gridlock, and political concerns popping up across the world, small-caps are a safer place to invest because they are less exposed to these issues. Agree or disagree, and why?
The general consensus was in agreement that small-caps were a safer place to invest in the midst of trade tensions. However, as I pointed out with the following answer, small-caps have actually underperformed since the beginning of the Trump administration:
JH: I generally disagree and the data confirms this. Since January 2017, the S&P 500 has outperformed the Russell 2000 by 10%. Keep in mind that small caps also sell products to large caps. That being said, you really have to take each industry or stock on a case by case basis.
Certain individual, small-cap US companies can clearly provide a measure of protection from a trade war and, to be fair, this was probably how many of the other contributors where looking at it. However, the idea that owning a broad index of US small-caps (i.e., the Russell 2000) would provide a measure of protection failed.
This comes back to the fact that narratives tend to develop amongst the financial community and these get carried around often with little regard to reality. The truth is almost always far more nuanced. As we move into 2019, I am looking forward to an invigorated effort of helping investors see through the trees of the investment forest with the True Vine Letter.
Thanks for reading and Merry Christmas.
Joshua Hall, ChFC