Small Cap Macro Mosaic

07/20/10 -

Small & Large. The Russell 2000 posted a 1.9% return for the 2 weeks ended July 16, 2010 while the S&P 500 posted a 4.2% return. The R2000 closed at 610, while the S&P 500 closed at 1,065.  The Russell 2000 is posting 0.2% QTD returns, compared with the S&P 500, which is posting 3.4% returns for the quarter.

In addition to our normal Macro Mosaic analysis, this week we present three Special Studies.  Highlights below:

A different look at railroad data.  Railcars loaded data on a y/y basis is up nearly +9% (using 4-week moving average) but much of the positive change stems from bouncing off the historic lows seen in mid-'09.  When examined from a different perspective, recent railcar data does not appear as positive.  This year's seasonal April to July decline (-8.2%) has been the second worst posted in the past 23 years and compares to the -5% average seasonal decline since 1988.   We note July 2010 data is only through the first 2 weeks.  We await data from the rest of July and September for more signals. 

Mortgage delinquencies take a wrong turn.  After falling for three straight quarters from their 1Q09 peak, new mortgage delinquencies, both prime and sub-prime, ticked up again in 1Q10.  The increase in percent of mortgage loans 30 days past due suggest homeowners are still under considerable stress as job growth remains weak and unemployment benefits run out.  The q/q rate of change in sub-prime delinquency was its highest since '05 when nominal delinquency rates were much lower.  Prime delinquency rates actually grew marginally faster than sub-prime from 4Q09 to 1Q10.

Equity Size and Style Returns in Various GDP Growth Periods.  With an increasing number of economists lowering their expectations for near-term GDP growth, and rising disagreement about U.S. growth potential, we examine which equity size and style categories historically perform the best in different GDP growth scenarios.   Believers in the "new normal" philosophy of 1-2% GDP growth should own mid-cap and small-cap stocks, either growth or value, as these tend to post the best relative performance in slow GDP growth periods.   Those with a slightly optimistic view will want to own only mid-cap value and small-cap value, as these do best when GDP growth is between 2.5%-3.5%.   Either way, mid-cap and small-cap value are poised to outperform.     Large-cap growth prospects do not look good from a historical perspective (unless one is of the most optimistic demeanor).   Large-cap growth has historically performed well only when GDP growth has been very high.