Equity markets get body slammed with small caps taking the biggest hit

A brutal week for risk-taking – all major equity asset classes lost money last week
- Higher rates contributed to this as well as slower expected global growth
EM Equities lost the least last week (-2%) but continue being the worst performing equity class YTD (-13.6%)
YTD US Large Cap has leapfrogged small caps
- Small caps are down 10% in the last month
Our top-rated asset class at the moment is International Developed Markets (EAFE) but last week was not good for this asset (-3.9%)
Year-to-date US equities are vastly out-performing international assets – strong home bias fuelled by strong US growth plus an appreciating US dollar
In the US Growth outperformed Value but internationally the opposite was true – Investors keep hoping for Value to play better defense
Last week woke up investors to equity risk – our Risk Aversion Index jumped to the very top of the Normal Zone

Countries & Region:

Carnage all over the place – a global retreat from risky assets
Equities vastly under-performed bonds last week despite generally higher global interest rates
In the US Growth out-performed Value over the last 5 trading days but in the rest of the world Value outperformed
- Traditional Value sectors such as Industrials, Materials, and Financials got hit hardest
Utilities and Staples, two traditional low beta sectors lost the least

In the US, mega-caps outperformed (lost less, unfortunately)
Value once again under-performed Growth –mainly due to losses in the Industrials, Materials and Finance sectors
Growth and Momentum keep dominating YTD among US stocks
Developed international markets slightly outperformed the US but remain in the red for the year
EM LATAM recovered last week driven by Brazilian election results favoring a pro-business candidate

Risk Aversion should stay high and we expect choppy markets this coming week
Technicals have deteriorated massively – sure looks like a bear market or at least a very serious correction
The battle may not be between growth and value – feels more like momentum versus reversal
Tariff wars are taking a bite with the IMF recently citing trade wars as the main reason for a cut in their forecast of global growth
Small caps have massively underperformed large caps over the last 3 months – risk is being shunned at the moment
- Our models still like small caps better
Will EM equities recover? Seems to be all about the direction of the US dollar at the moment. Pretty beat up despite stronger fundamentals
What form will sanctions take against Saudi Arabia?
- Maybe they get a free pass but in any case, I would expect the oil market to be materially affected.
- Q3 reporting starts in the US – looking for commentary on tariffs, slowing growth, and inflationary pressures

To read our weekly report including style factor breakdowns please click here

Eric J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

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