Size Matters

The big story of Q4 2020 is not sector rotation and it’s not Value > Growth (even though your favorite financial news network may paint it that way). The real story is a rotation away from Largecaps and into Smallcap stocks. Independent of both sector and of the growth/value style factor. Sure, QTD Largecap Energy and Financials are leading both Technology and Consumer Discretionary - but what about the Smallcaps? The Russell 2000 is outperforming the S&P 500 by nearly 3x QTD and in early December, surpassed the benchmark US stock index in YTD performance as well. In the Largecap universe, the sectors that underperformed in Q1-Q3 are now outperforming in Q4. Is this the case in Smallcaps as well? Not quite. Smallcap Technology continues to lead both Financials and Industrials. The Financials sector is also nearing new lows relative to Smallcap Technology. It’s important to note, this does not fit with the Value > Growth narrative.

Let’s break down what it takes for Value to outperform Growth. In the Smallcap universe, Financials and Industrials must outperform Healthcare and Information Technology. On the industry level, it would be very important for Banks and Real Estate to outperform Biotech and Software. There has been very little technical evidence that these scenarios are playing out, or for that matter will play out in the future. I’d argue that focusing on Smallcaps when it comes to the Value vs. Growth argument is much more practical, due to the recent strength of the Russell 2000 over the S&P 500.

Now let’s look at what it will take for Value to outperform Growth on the Largecap level. We will need to see Financials and Healthcare beat out Information Technology and Consumer Discretionary. On the industry level, it will be very important for Banks, Healthcare Providers, Pharmaceuticals and Oil, Gas and Consumable Fuels to outperform Software, Technology Hardware, Internet -Direct Marketing Retail and Semiconductors. Once again, there is very little technical evidence of these scenarios currently playing out in the market. However waning, the strength continues to reside in the camp of Growth over Value.

Any thesis or macro view of the US Stock Market can/will change as new data is entered into the equation. What worked this quarter or this year is not promised to work the following year. However, in the words of one of the brightest technicians I know...

That’s enough out of me!