On this episode of KayneCast Jordan Greenhouse, Managing Director with Kayne Anderson Rudnick and Julie Kutasov, Portfolio Manager of the KAR Small Cap Quality Value Strategy to discuss the Q4 stock market review and the outlook for the Small Cap Value Portfolio for 2023.
Improved Inflation Data Causes Small Cap Value Equity Rally
Kutasov notes that equities rallied in the fourth quarter following better-than-expected inflation data and comments made by Federal Reserve Chairman Powell indicated that the central bank would ease the pace of interest rate increases in 2023. A combination of aggressive monetary policy on the part of the Fed and a reduction in post-pandemic supply chain disruptions helped slow inflation as the year came to a close.
The Russell 2000 Value benchmark’s performance was driven by lower quality names during the fourth quarter, with commodities, energy, materials, and utilities making significant contributions to the benchmark’s performance.
Challenges and the Small Cap Value Outlook for 2023
Going into 2023, Kutasov notes that challenges like Covid-19 could hamper supply chain recovery. Additionally, slow economic growth continues to impact investor concerns over a potential recession just as the market is recovering from inflationary pressures exacerbated by turmoil and uncertainty on the geopolitical front.
Kutasov states that inflation, while slowing, will continue to impact consumer spending, the key driver of the US economy. Inflation also continues to negatively impact businesses that cannot offset their input cost increases with higher prices.
While fears of a recession continue, Kutasov believes the central bank’s interest rate policy will mitigate a potential downturn’s severity. She notes, “Employment and wage inflation will be key to watch, however, with current labor supply resilient and wage growth above levels the Fed sees as consistent with its two percent inflation goal.”
As for investor reactions to these factors, Kutasov believes slowing economic growth usually drives investors to focus on quality, with investors favoring companies with solid balance sheets, earning stability, strong returns on capital, and sustainable secular growth. As always, the KAR Small Cap Quality Value strategy remains focused on seeking out differentiated businesses and self-funding entities.
Listen to the podcast to learn more about Small Cap Quality Value fared in Q4 2022, or read our complete 4Q 2022 Commentary, where KAR CIO Doug Foreman reviews market performance and the good and bad news as we look ahead to 2023.
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein. Past performance is no guarantee of future results.