Almost A Correction In Small Cap Growth

Are We In A Correction?

It sounds silly to ask if we are in a correction because the S&P 500 is 22 basis points off its record high with its decline on Tuesday. However, it's not asking if we are in a correction in large caps. It's asking if we are in a correction in small cap growth stocks. The small cap growth index was down 2.25% on Tuesday, putting it down 3.39% in this 3-day losing streak. The index is still up 8.48% in the past month.

This correction could be caused by it being overbought rather than any macro changes. Small cap value had been avoiding the decline until Tuesday when it fell 1.68%. It was at its recent high on Monday. The index is now up 1.28% year to date. With the rally in the fall, this has no longer been a disastrous year for small cap value, but it has still underperformed most factors. Stitch Fix SFIX fell another 2.33% on Tuesday, putting it down 13.85% in the past few days.

Some might wonder why it's worth it to discuss this name often. Some feel it is a bubble because the stock doubled on 10% sales growth instead of 8%. That’s not much growth for what is supposed to be a disruptor. Net revenue per client actually fell 4% yearly. Its adjusted EBITDA margin was 1%. It's hard to understand why anyone would invest in a cash-burning business with slow growth. The stock was up because of a short squeeze similar to GameStop.

Getting back to the original question of whether we are a correction, the answer is no. Some don’t see this as a correction, but as low volume trading where people are making final adjustments to their portfolios before the year ends. The year will start with a bang because the election is on the 5th and there will be increased scrutiny on the way the vaccine is distributed. 

If the vaccine distribution gets botched before January 20th, we may have new leadership pretty soon anyway. The market hasn’t expressed any worry about the vaccine’s distribution. Whether America achieves herd immunity by March or July doesn’t really matter to investors, but of course, it matters to the health of the country.

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