On the surface, Tuesday's market action seemed like a somewhat typical down day, with the S&P 500 dropping 0.76% and most of the damage occurring later in the trading day. However, my screen was telling a slightly different story as smaller names got hammered. Damage to the Russell 2000 Index (down 3.58%) and Russell Microcap Index (down 4.55%) was significantly more severe than their larger-cap cousins. That's not the first time we've seen smaller names suffer greater damage, and it won't be the last.
Smaller names have been outperforming year-to-date; through Tuesday the Russell 2000 (up 10.88%) and Russell Microcap (up 23.22%) are well ahead of the S&P 500 (up 4.11%). Tuesday's action may signal a combination of things. First, that smaller names are cooling off following their very strong recent performance, and second, that there is some market skittishness about the new tax bill and its prospects to be put into law. To the extent that the latter could be harmful to the markets, I'd expect it would be more detrimental to smaller names, which are typically hit harder when markets fall. I don't have a crystal ball and don't know where this is going, but my spidey senses are tingling.
Meanwhile, I continue to look for undervalued names, those that are pretty well beaten-up and might show some upside in what I believe could be a challenging environment. It's a tall order at best, but one area I continue to scour Is agricultural land. To that end, this week I increased my position in one of the riskier ag names available, Cresud (CRESY) . Based in anti-capitalist Argentina, a bit heavy on the debt side but priced accordingly, I've owned this one several times over the years. It is not for the risk-averse; a great deal could go wrong, but I probably can say the same about many of the reclamation projects to which I am drawn.
I can't imagine the Federal Reserve is going to be able to keep a lid on inflation the way it wants to, and ag land could be a piece of the pie as a hedge. I will be looking for more of it, but likely a bit closer to home.
