The first quarter of 2015 was a tale of two markets: with large caps and small caps delivering very different performances.
Large cap stocks, as represented by the S&P 500 Index, barely managed their ninth consecutive quarterly gain, up a paltry 0.44%.
While the Dow actually ended the quarter in negative territory, down -0.26%.
Mid-Caps Ruled
The big winner for the quarter were mid-cap stocks with the S&P MidCap 400 Index up 4.6% through quarter-end.
The tech-laden NASDAQ Composite and the small-cap Russell 2000 Index also posted strong returns, up 3.5% and 4% respectively.
Mighty Dollar
Certainly one big factor stifling large cap returns during the quarter was the strong dollar.
The ICE Dollar Index (DXY) hit a12-year high as of the end of the first quarter, fueling concerns about the earnings prospects for large multinationals that rely heavily on foreign sales.
As a result, investors shunned large caps in favor of small and mid capitalization names.
But large caps were not the only victims of the strong dollar.
Record crude supply combined with the strong dollar sent West Texas Intermediate (WTI) crude oil prices tumbling another 10% for the quarter, extending the 46% plunge in prices seen in 2014.
Mid-Cap Strengths
So given all this market volatility, why did mid-cap stocks fare so well this quarter?
During the quarter, mid-cap stocks benefited from lower U.S. dollar exposure.
Like small caps, they typically rely less on foreign sales.
Mid caps were also helped by their lower exposure to energy, which was the worst performing sector for the quarter.
Biotech Plays
Health Care was the big winner this quarter, and many mid-cap pharma and biotech names posted solid results for the period.
Biopharmaceutical company Medivation (MDVN) was one of the top performing healthcare names in the EQM Capital Mid Quant portfolio, thanks to the release of favorable data for its prostate cancer Xtandi.
Medical diagnostic company Hologic (HOLX) was also a strong performer as its 3-D imaging technology continues to gain rapid adoption.
Tech Gainers
In technology, Ambarella (AMBA), a provider of HD video processing technology used in devices such as the Go-Pro Camera, delivered strong returns for the portfolio during the quarter.
And Apple (AAPL) chip supplier Skyworks Solutions (SWKS) was another holding which was a big gainer in Q1.
Weak Performers
Not all my holdings performed well, however.
(The two holdings discussed below are the only ones that did not perform well in Q1.)
Trucking company Old Dominion (ODFL) and energy pipeline company MPLX (MPLX) ended registered declines and negatively impacted the portfolio.
On a net basis, the EQM Mid Cap Quant portfolio gained 10.7% net of fees versus 4.6% for the S&P 400 Index, as strong stock selection added significant value this quarter.
Robust Outlook
Of course, there is no guarantee the strong performance will continue.
However, in my opinion the outlook for mid-caps remains positive for the following reasons:
- Less dollar exposure: The strong dollar will remain a negative headwind for large cap multinationals as earnings season approaches.
- Leveraged to growth sectors: Market leadership should remain narrow, with domestically-oriented sectors like healthcare and consumer discretionary stocks likely to fare the best in the current market environment.
- Growth being rewarded: And whereas some valuations may appear stretched, many mid-cap stocks in my view are still exhibiting strong relative growth which should be rewarded a premium by investors.
Photo Credit: Chris Brown via Flickr Creative Commons
The investments discussed are held in client accounts as of April 8, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
