Much-Ado-About-Nothing August Masks Bleeding in Smaller Firms

(Bloomberg) -- August will go down in history as the month that drove investors crazy but left them ultimately unscathed. Dig a little, and the pain of the past 22 sessions was a little deeper than it looks on a chart.

The S&P 500 lost 1.8% -- not stellar but the furthest thing from unprecedented, and in fact the smallest drop for any down month in the past two years. But the index’s equal-weighted version that strips out capitalization weightings and makes no distinction between Microsoft Corp. and Nektar Therapeutics -- the smallest company by market cap in the benchmark -- fell 3.3%. It trailed the S&P 500 by the widest spread since 2011.

In other words, if not for megacaps, the monthly decline would’ve been worse. Littler firms trailing big ones isn’t new, but underperformance in the equal-weight gauge makes life harder for stock pickers. It also reliably sounds alarms about the strength of the domestic economy, where small caps draw their strength.

“That small companies are in a downtrend while large companies are in an uptrend is very worrisome,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “Smaller firms feel the downtrend in the U.S. economy more than megacaps. To some investors, larger companies are more like ports in the storm, if you will, as opposed to smaller companies that are more vulnerable to uncertainties.”

It hasn’t always been thus. The first few years of the bull market were marked by unprecedented breadth, with the equal-weighted index outperforming the cap-weighted analog by 89 points between 2009 and 2014. That happened partly as three rounds of quantitative stimulus boosted appetite for riskier assets that gave smaller companies a reliable lift.

Fast-forward and the regular S&P 500 has outperformed its equal-weighted peer for all but one year since 2015, an era dominated by the Fang block of Facebook, Amazon, Netflix and Google. The ratio of the Invesco S&P Equal Weight ETF to the SPDR S&P 500 ETF Trust has been in a downtrend since mid-2015, with the trend accelerating following the 2016 presidential election.

The 10 biggest losers in the S&P 500 in August were all companies with market capitalization of less than $15 billion. Of the 20 worst performers in the S&P last month, just one -- General Electric Co. -- had a market value above $30 billion.

The pain was especially pronounced among retailers and health-care firms. Macy’s Inc. lost a third of its value in August as it trimmed its guidance as China tariffs crimped growth. Nektar Therapeutics, which sources the majority its revenue in the U.S., plunged 38% in August on a manufacturing snafu. Michael Kors parent Capri Holdings, which derives more than 60% of its revenue at home, according to Bloomberg data, fell 26%. They all are grappling with company-specific issues, but the losses are part of bigger market trends.

To be sure, the top-10 performing stocks in the S&P last month were relatively tiny companies, too, but large-cap firms occupied the solid middle. Microsoft gained 1.2% and Twitter Inc. added 0.8%, while the $135 billion Salesforce.com added 1%. All told, the Russell 2000 firms fell 5.1% for the month, underperforming the S&P 500 Index by the most in five months. The S&P Midcap 400 Index lost 4.4% for the month.

“Investors are quite nervous about the future,” said Matt Maley, equity strategist at Miller Tabak + Co. “They’re buying the big-cap names because they feel safer in those stocks. If investors weren’t nervous, they’d be happy to buy the smaller- and medium-sized names, but they’re avoiding them right now.”

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Chris Nagi, Courtney Dentch

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