Welcome to edition 516 of Insider Weekends. To the surprise of many market participants, including myself, the U.S. market continued to rally last week with the beaten down Russell 2000 index, which represents small cap companies, registering a gain of 5.2% and the Nasdaq close behind with a gain of 4.7% for the week. Over the last month both the Nasdaq and the S&P 500 have registered double digit gains but the Russell 2000 index lagged behind them and is still down nearly 20% over the last three months despite recent gains.
AQR’s Cliff Asness covers some of this dichotomy between large cap growth and small cap value in his latest perspective Is (Systemic) Value Investing Dead?. This dichotomy does not fully explain the rally we have seen off the March lows and investors appear to be firmly focused on the following four positive factors,
A lot of small businesses that missed out on the first $350 billion tranche of PPP loans have now been able to get that loan and I am hearing that people have been able to get unemployment benefits. The employment divisions of several states were overwhelmed in the early days of this crisis by the huge surge in unemployment filings. These positive developments are juxtaposed with news of small businesses permanently shutting down, large companies significantly scaling back capital investments and industries that have been decimated including the auto, energy and travel industries.
I wrote last week that I don’t think the risks outweigh rewards at this point. I mentioned “That does not mean I have not been nibbling on the long side and started a new position last week that I plan to add to in the coming months…”.