Growth Is Still Hot Only In Small Caps

In July, the total return of the S&P SmallCap 600 Growth was 3.75%, which was 1.15% higher than the total return of 2.60% generated by the S&P SmallCap 600 Value.  This is interesting since typically growth does not outperform value in small caps when value outperforms growth in large and mid caps.  (In July, the total return of S&P MidCap 400 Growth, S&P MidCap 400 Value, S&P 500 Growth and S&P 500 Value was a respective 1.38%, 2.17%, 3.44% and 4.05%.)  In 255 months, going back to May 1997, there are only 17 times when growth outperformed value in only small caps.  It is even rarer to find growth performing better than value in just small caps with the current magnitude of outperformance.  It was in Sep. 2005, almost 13 years ago, when the outperformance of small cap growth over value was this big while value outperformed growth in large and mid caps.  It is also only the 5th biggest outperformance of growth over value in small caps in a month while value outperformed growth in large and mid caps in the entire history of the data. Source: S&P Dow Jones Indices

While all eleven sectors in the S&P 600 were positive in July, the best performing sectors were industrials, materials and health care, up a respective 6.6%, 4.4% and 3.7%.  Also industrials and health care are the two most overweighted sectors in small caps when comparing growth to value.  Health care has 13.2% more weight in growth than value in small caps, while small cap industrials weigh 3.6% more in growth than value.  The weights of growth over value in these sectors are bigger for small caps than large or mid caps.

Source: S&P Dow Jones Indices.

Also, in July, small caps outperformed large caps in materials by 1.4% and energy by 0.2%.  This helped contribute to the month’s small cap growth outperformance since although the growth weight was less than the value weight, it was by less than in the bigger stocks.

Overall, the total return for the S&P 500, S&P 400 and S&P 600 was 3.7%, 1.8% and 3.2%,  respectively, in July.  All sectors in large and small caps gained with industrials, health care and financials leading, likely from growth.  Historically financials and health care are the two sectors that benefit most from GDP growth, with small caps rising on average 6.9% and 6.4% with every 1% of growth.  Large caps in these sectors also benefit, each rising on average 4.5% for each 1% of GDP growth.  Also industrials benefit highly from rising interest rates with small caps and large caps gaining 8.6% and 8.2%, respectively, on average for every 100 basis point rise in rates.  Although rates didn’t increase, the market may be looking ahead to Sept. when there is a chance for an increase.  Lastly, industrials were also helped by the renewed trade negotiations between China and the U.S.

Source: S&P Dow Jones Indices

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