North American Smaller Companies

April 2019

Market review

The US small-cap equity market, as measured by the Russell 2000 Index,1 continued its advance in April, finishing up 3.40%, while extending its year-to-date gain to 18.48%. The market was buoyed by better-than-expected US economic data released during the month, as well as a strong start to the first-quarter 2019 reporting season. We believe that investors slowly came around to the realization that macroeconomic conditions are not nearly as bad as feared and that earnings estimates have been reduced too much since the start of 2019. Performance by sector within the Russell 2000 Index was somewhat mixed in April, and small-cap value stocks slightly outperformed their growth counterparts. Industrials and financials (which historically have been value sectors) led the index for the month, followed closely by information technology and consumer discretionary (historically growth sectors). Healthcare was the only sector to record a negative return in April, as biotechnology stocks surrendered some of their strong year-to-date gains. This allowed the quality factor2 to marginally outperform the overall small-cap market during the month.


Our market outlook has not changed significantly since last month, though we would add the following comments concerning incremental developments in April. We feel that US macroeconomic indicators improved for the most part during the month: jobless claims continued to trend at very low levels; small business optimism rose; and most importantly, in our view, the initial first-quarter 2019 gross domestic product (GDP) growth reading was above 3%, exceeding expectations. While some “transitory’” issues likely aided the GDP data and these may reverse in coming quarters, we think that the economy remains on firm footing and we still view the macroeconomic backdrop as conducive for reasonably strong fundamental performance. For example, first-quarter 2019 corporate results are largely coming in ahead of consensus expectations on both the top and bottom lines, and strategists’ forecasts of an “earnings recession” now seem somewhat misplaced, in our opinion. While first- and second-quarter earnings growth in 2019 could be challenged by the tough year-over-year comparisons caused by the impact of tax reform in 2018, we see a strong likelihood of growth resuming in the second half of this year. It is important to note that, after falling for much of the year, corporate earnings estimates are now generally moving higher. The forward price/earnings multiple for the Russell 2000 Index expanded by just under 1 point for the month (to 16.2x forward earnings, excluding non-earners), though the index still trades at a 1-point discount to the U.S. broader-market S&P 500 Index. As we believe that the economic backdrop is stable and a recession is not imminent, we feel that the valuation discount of small-cap stocks relative to large-cap company shares is somewhat unwarranted.

1 The Russell 2000 Index is an unmanaged index considered representative of U.S. small-cap stocks. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
2 The quality factor comprises companies with low debt, stable earnings, consistent asset growth, and strong corporate governance.



Smaller-company stocks are usually less stable in price and less liquid than those of larger, more established companies, and therefore carry greater risk to investors.

Ref. US-030519-88815-24