Investment Corner with Jason & Sean: U.S. Small Cap Equities

“History never repeats itself, but it often rhymes.” – Mark Twain

The internet is going to change the world. It was a statement made 100s of times a day in the late 1990s, both to describe the incredible innovation within the “World Wide Web¹” and the incredible valuations and market capitalization ascribed to companies that were at the forefront of the internet boom. Throughout the late 90’s, the “internet” theme became a runaway train of sorts, with internet companies like a then little-known internet bookstore called Amazon, the infamous Pets.com and the supercharged internet search engine Yahoo! rocketing into the stratosphere. While Amazon has gone on to incredible success (and market capitalization!), Pets.com went bankrupt in under a year, and Yahoo! is a mere afterthought² failing to live up to its initial promise.

One could be forgiven if your memory comes up empty on positive/constructive/overweight commentary around small-cap stocks in the late 90s, as there weren’t many to find. Small-cap stocks did not have the cache of internet stocks and even when internet stocks IPO’d as small-cap stocks, as Amazon did in 1997 ($300 million market cap), they did not stay there for very long. These high-flying internet stocks would reach their nadir in late 1999/early 2000 and then proceed to run smack into the harsh reality of recession, exogenous geopolitical events, and earnings that could not justify the lofty valuations. For the decade that started on January 1st, 2000, and ended on December 31st, 2009, the S&P 500 had an annualized return of -0.95%³ and a cumulative negative return of -9.10%. Over the same time period the Russell 2000, the index that makes up the smallest 2000 stocks in the U.S., had an annualized return of +3.51% and positive cumulative return of +41.26%⁴. 

Fast forward almost 25 years and capital markets and investors find themselves in a familiar space. All investors are talking about is “artificial intelligence” and the “Magnificent 7” mega-cap technology stocks that makeup almost 30% of the S&P 500 market capitalization. Some things are different from the internet age, namely, these technology companies have much stronger revenue numbers and use cases, the internet has evolved, the cell phone morphed into the iPhone/Android (a personal computer held in your hand), among others. However, the valuations ascribed to these technology companies have now come into question, with Tesla off over 30% this year and supercharged semiconductor company, Nvidia, off 20% from its March highs. 

This week promises to be a big week for markets and technology companies, as higher for longer interest rates will collide with lofty valuations; earnings and more importantly the trajectory of earnings growth will determine whether these technology companies keep pressing forward or if a new regime will take hold. Investors would be wise to remember Mark Twain’s words and look toward U.S. Small Caps, which are under-loved, under-owned, and potentially set up for another surprising move higher at the moment the market has seemingly forgotten about them.

¹ For those readers under the age of 30, that is what the www. stands for in your internet browser. 
² Currently owned by private equity giant Apollo with a smaller minority investor in Verizon.
³ Source: Morningstar Direct. Dividends are reinvested using total return calculations. 
⁴ Source: Morningstar Direct. Dividends are reinvested using total return calculations. 

About Schneider Wealth Management  

Schneider Downs Wealth Management has been providing investment and retirement services since 2000. Although our service platforms continue to evolve, commitment to our clients remains our first priority. Our service is tailored to your individualized goals but built on the fundamental principles of our practice: fiduciary guidance, fee transparency and goal-based decision-making.

To learn more, visit our dedicated Wealth Management page. 

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. The material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.