Big Things Come In Small Packages

What a year 2018 has been for small caps. With the Russell 2000 Index up about 6% year to date versus the S&P 500 Index up only 2%, it has been quite the year so far for small companies. Tax reform is the big tailwind for the group, but the strength really didn’t take off until the trade war worries heated up in March. Remember, small caps generate much less of their revenue overseas than large caps, so they are more protected from any potential trade war.

Here’s the big question though: can this recent blip of outperformance stick? We think so, as we will discuss in detail later today in our Weekly Market Commentary. “Big things come in small packages,” and we think this recent small cap strength can continue. From tax reform to tariff worries, there are some nice tailwinds for small caps to continue to lead their big cap brothers over the rest of 2018,” explained Ryan Detrick, Senior Market Strategist.

As our LPL Chart of the Day shows, the S&P Small Cap 600 advance/decline (A/D) line recently made new highs. This is one of our favorite market breadth indicators, and it suggests that many small cap stocks are participating in this move—thus increasing our confidence that the rally continues.

 

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

The prices of small cap stocks are generally more volatile than those of large cap stocks.

Market breadth — a technical analysis technique that looks to gauge the direction of the market by comparing the number of companies advancing relative to the number of companies declining. Market breadth is positive when more companies are moving higher.

Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends.  Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results.  Technical analysis should be used in conjunction with fundamental analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs, are examples.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The S&P Small Cap 600 covers approximately 3% of the domestic equities market. Measuring the small cap segment of the market that is typically renowned for poor trading liquidity and financial instability, the index is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable.

The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe.

The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index.

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