In the last post, we saw a shift in patterns of sector strength and weakness from the first half of 2008 to the second half, roughly corresponding to the turn in the commodity markets. This shift has also been evident in patterns of strength and weakness among investment styles within the small cap and mid cap universes.
As the chart above shows, first half performance (blue bars) among small cap value (IWN) and small cap growth (IWO) styles was relatively equal. During the second half of the year to date, however (red bars), small cap growth has notably underperformed value.
This same pattern was even more evident among mid cap value (IJJ) and mid cap growth (IJK) styles. Mid-cap growth was a relative outperformer during the first half of the year, but has been the performance laggard since June.
What we've seen thus far in 2008, it appears, is a rotation of sector themes, investment styles, and asset class performance away from stagflation as a central concern and toward recession and deflation. Since mid-2008, we've seen a notable downturn in commodity prices, a shift away from growth stocks, an upward move in the U.S. dollar index, a collapse among stocks in the energy and materials sectors, and relative weakness among resource-rich emerging markets such as Russia and Brazil. There has been much talk of protecting Main Street from the recent crises on Wall St., but the markets are suggesting that the damage, in the form of sharply lowered growth and demand for commodities, is already unfolding.
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