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News & Our Thinking

News & Our Thinking
Small Cap

Small Cap Commentary – 3Q21

07 October 2021

The debate surrounding inflation is still going strong. The Federal Reserve and the Biden Administration indicate that this period of high inflation is transitory, a result of the pandemic. The Labor Department issued its latest data for August and inflation did slow for the month. On the other hand, prices are still rising at nearly the highest rate in more than twelve years. Americans are paying more for everything, from haircuts to houses and gasoline to groceries. Prices of new cars and electronics continue to show upward price pressure from the shortage of semiconductors. Shipping issues and supply constraints have contributed to higher prices for appliances, furniture, sporting goods and clothing. Additionally, due to worker shortages, we may begin to see prices rise for all kinds of services from trash collection to meals at restaurants. The bottom line is that inflation is high, but not quite as high as it has been. Right now, it is anyone’s guess as to whether inflation is truly transitory.

Over the last few months, we’ve received some questions from clients regarding how small caps as an asset class stand up against inflation. Generally, small cap stocks tend to perform well during periods of inflation. They are the only major asset class since the 1930s to outperform inflation in every single decade. Furthermore, since 2010, small cap stocks have outperformed large cap stocks during periods of rising inflation expectations. This is illustrated by the chart below which shows the performance of small cap stocks relative to large cap stocks (dark blue line) compared to inflation expectations (light blue line).

These statistics might be somewhat surprising at first glance. However, on close examination, small cap companies typically offer niche products with fewer alternatives. This gives small caps more room to pass along increasing material costs to their end customers and maintain their profit margins more easily than larger companies.

While our crystal ball is no clearer than others and we can’t predict the future of where inflation will be in the next few months, we take a measured long-term approach to stock selection. We look to include companies in the Argent Small Cap portfolio with durable growth, strong balance sheets and management teams that are good stewards of capital.

We are open for business and welcome your interest in Argent Capital. In addition, if you like our market letters, we hope you will pass them on to friends. We have four successful equity strategies – Large Cap U.S., Small Cap U.S., Dividend Select and Mid Cap U.S.

Peter Roy

Portfolio Manager

See PDF Version: Small Cap Commentary 3Q21

Performance results are net of fees. Past performance is no guarantee of future results. This is supplied as supplemental information to the composite disclosures presented later in this document. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities were or will be profitable. A list of stocks recommended by Argent in the previous year is available upon request. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change.