The Piton Investment Team took some time to analyze data about Small and Mid Cap (SMID) companies. Over the past few years, when the “Magnificent Seven” were dominating the market, the team saw research suggesting that SMID stocks were overdue for a comeback, so they have been keeping an eye out for signs of such a resurgence. This past quarter was certainly such a sign. Even with a war and energy crisis at play, equities delivered the 12th best quarterly performance for the S&P 500 since 1950 (+14.9%) and the 8th best showing for the Russell 2000, with its focus on SMID, since it was created in the 1970’s (+21.2%). This chart compares the performance of the Russell 2000 to other indexes.
The above suggests a broadening out of strength in the equities market, which the team reads a positive sign of economic resilience in general. Barring a recession or a large-scale disruptive event, this pattern can portend continued strength for SMID companies. For a number of reasons, the team does not anticipate a recessionary environment. In the absence of an unforeseen massive disruptive event, another factor seems positive. The Investment Team considers the reshoring movement a major factor in the economic environment broadly. The following compares annualized trailing 10-year relative total returns of the S&P 500 and Russell 2000.
Competition from lower-priced labor and goods globally, near-zero interest rates and quantitative easing (QE in the chart) allowed little pricing power for SMID companies. With recent interest rates and inflation returning to historical averages, and Reshoring overtaking Globalization, the graph shows a turn in this trend, which the team hopes is anchored in fundamentals that will continue.
Piton clients can attend the upcoming Live Client Connector (July 16) for more discussion on this topic, as well as expect that the team will be executing changes in Piton portfolios based on research into particular companies involved in this trend.