Micro-caps Continue to Reward Risk

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imagesCAGROI41Micro-cap Market Report: October 21, 2013 – The government reopened last week and a debt ceiling disaster was averted…for now. That was enough to send U.S. stocks, including micro-caps racing toward fresh record highs. The S&P 500 gained nearly 2 1/2 percent in a record-setting week. The Nasdaq Composite, thanks in large part to Google (NASDAQ: GOOG) racing to $1,000 a share, was even better with a weekly gain of nearly 3.25 percent while the Dow Jones Industrial Average added just over 1.0 percent.

It was not surprising that markets rallied after policymakers were finally able to reach a budget deal. After all, riskier assets held up surprisingly well during the days and weeks it took to get to the agreement. However, there is no denying that Washington’s flair for the dramatic can take its toll on sentiment and in statistics.

Cost to be determined

The cost of the government shutdown is measured in the hundreds of millions of dollars per day. It is a long way off, but that means when fourth-quarter GDP estimates start arriving early next year, they probably will not be too appealing.

Micro-caps are steaming hot

Last week was an excellent one for small-caps and micro-caps with the iShares Russell Micro-Cap ETF (NYSE: IWC) gaining 2.7 percent. The Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) rose to a new high with a weekly gain of 2.8 percent.

The Markets @ 10/18/2013
Index Close Weekly % Change YTD Change YTD%
DJIA 15399.65 162.54 1.07% 2295.51 17.52%
NASDAQ 3914.28 122.41 3.23% 894.77 29.63%
S&P 500 1744.5 41.3 2.42% 318.31 22.32%
NYSE Comp 9984.63 222.87 2.28% 1541.12 18.25%
NYSE MKT 2413.55 73.24 3.13% 57.89 2.46%
RUS 2000 110.69 3.01 2.80% 26.61 31.65%
RUS MICRO 70.99 1.83 2.65% 18.67 35.68%
VANG INTL 51.99 1.28 2.52% 5.69 12.29%
CHINA INDEX 7144.98 335.31 4.92% 2706.46 60.98%
EMERG MKTS 7086.97 130.53 1.88% 47 0.67%

Market Report

The 16-day government shutdown government reduced growth by 0.3 percentage point this quarter, according to economists surveyed by Bloomberg. In a perverse way, that could work out to be good news.

Remember the issue of Federal Reserve tapering? It got lost in the shuffle of the shutdown. Since the shutdown forced the delay of several marquee economic data points, including the September jobs report, it is believed the Fed cannot even remotely start to re-consider tapering until its March 2014 meeting.

Even that scenario is somewhat unlikely because, assuming she is confirmed, Janet Yellen will have been on the job as Fed chair for less than two months by the time the March reading rolls around. The already dovish Yellen probably will not want to make one of her first acts as Fed leader a reduction in the central bank’s bond buying efforts.

That should bolster risk appetite, in turn providing for more for micro-caps through year-end and into the first quarter of 2014. The week ahead should be a busy one on the economic data front as existing home sales data will be released Monday and the aforementioned September jobs report will be out on Tuesday.

Take a picture of this one… it’s GREEN across the board

Every major index we follow was up this past week AND broke into the green YTD as well.

China is definitely leading the parade

China was by far the leader in the club house… + 4.92% for the week. And that adds up to a 60.98% gain YTD.

CONTINUING…

Gold was up… +$46.40 to close at $1,314.40.

Oil was off $1.21 this past week… prices closed Friday at $100.81.

The US Dollar was off too… – $0.0075 for the week to close at 0.7309 euros.

Bonds were up a bit. The 10-year bond gained $0.82 to close at $99.23 and the 30-year bond was up $1.45 to close at $99.47.

The Bottom Line for Stocks

Assuming no negative surprises emerge and earnings season continues to be as decent as it has been, there appear to be more sunny days ahead for stocks. The end of October brings an end to the worst six-month period in which to own stocks.

Small-caps and micro-caps have a tendency to start rallying late in the year, indicating that now might be a good time to consider an overweight position in low market cap shares.

In more specific terms, micro-cap precious metals miners might be coming back onto our radar, but consumer discretionary and health names continue to look appealing. Also held in high regard are micro-cap oil, gas and related services names.

Research and Editorial Staff
MicroCap MarketPlace
Mike Casson, Executive Editor

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