November 10, 2019 / 2:00 PM / 8 days ago

RPT-Wall St Week Ahead-Small-cap shares poised to benefit from shift to value

 (Repeats with no changes)
    By April Joyner
    NEW YORK, Nov 8 (Reuters) - Beleaguered shares of small U.S.
companies are set for a bump in performance as value stocks have
risen, market analysts say, but small caps could quickly fade
again with an economic setback.
    The small-cap Russell 2000 index        has lagged the
benchmark S&P 500        for much of 2019 and has yet to escape
the bear market it confirmed last December. 
    Still, so far this quarter, the Russell 2000 has risen 4.6%,
edging out the 3.6% rise in the S&P 500. The Russell's
outperformance is in tandem with the S&P 500 Value index       ,
whose 5.2% quarter-to-date climb has outpaced the S&P 500 Growth
index's        2.3% advance over the same period.
    Improving economic sentiment has prompted some investors to
take a second look at undeperformers among both value stocks and
small-cap shares. Value shares tend to be concentrated in
economically sensitive sectors such as financials and energy.
Shares of small-cap companies, which tend to be more
domestically focused than their large-cap counterparts, often
track investors' outlook on the U.S. economy. 
    Reflecting growing economic optimism, the benchmark 10-year
Treasury yield             has moved well off its early
September lows, and the yield curve between 3-month bills
           and 10-year notes has steepened. As a result, some
investors believe U.S. small-cap stocks are set to rally.
    The performance of financial shares, in particular, has
improved as yields have risen, which could help boost small-cap
shares. Financials make up 20% of the Russell 2000, as compared
to 13% of the S&P 500.
    "Higher rates tell us that you've got a stronger economy,"
said Gary Bradshaw, senior vice president and portfolio manager
at Hodges Capital Management in Dallas. "Small caps, which have
lagged the large caps, can certainly catch up (given) this
rotation into value."
    In recent months, Bradshaw said, Hodges has added positions
in small-cap value companies such as oil and natural gas
companies Matador Resources Co          and Parsley Energy Inc
       as well as Brinker International Inc        , which owns
Chili's restaurants.
    Though some market analysts are skeptical that large-cap
value shares will sustain their market leadership             ,
the improving earnings backdrop for small-cap companies could
nonetheless boost their shares.
    Earlier this year, the earnings growth rate for small-cap
companies lagged that of large-cap companies, in an aberration
from usual patterns, said Lori Calvasina, head of U.S. equity
strategy at RBC Capital Markets in New York. But since then,
small-cap earnings growth has recovered.
    "People like small caps because they offer superior earnings
growth longer-term," she said. "You couldn't really say that
based on these stats at the beginning of the year, but now we
look at these stats and the normal relationship is returning."
    Still, the outlook for small-cap shares is highly dependent
on U.S. economic data, which suggest a slowdown. The Institute
of Supply Management's widely followed manufacturing index, for
instance, has indicated a contraction in U.S. factory activity
for three straight months. A U.S.-China trade agreement would
help bolster economic indicators in the manufacturing and
industrial sectors, but it remains tentative.
    Data on October U.S. industrial production and retail sales,
along with the National Federation of Independent Business's
monthly small business survey, are scheduled for release next
week.
    "If we don't get a deal on trade, if we get more indications
that the U.S. economy is weaker, small caps are going to get
crushed," said Steven DeSanctis, equity strategist at Jefferies
in New York. "But I see (economic) growth holding up."
    

 (Reporting by April Joyner; Editing by Alden Bentley and
Cynthia Osterman)
  
 
 
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