Market Perspectives - June 2014

Experience Insight Impact

Overview: Domestic small-cap equities, generally defined as those with market capitalizations of less than $2 billion, are trading at significantly elevated valuation levels relative to their large-cap peers and historical norms. This month we highlight some of the key data points relating to this overvaluation.

biegelwaller.com

1

Small-Cap Equity Valuations

Experience Insight Impact 2

The Russell 2000 is the most closely followed equity index tracking the small-cap segment of the market. The Russell is trading at a trailing P/E multiple of 55.2x and a current year P/E of 25.8x. This compares to the S&P 500 trading at 17.7x and 16.3x, respectively.

The Russell 2000 Small Cap Index Appears Very Expensive

Experience Insight Impact

The Russell 2000 Small Cap Index Appears Very Expensive

3

Compared to most major markets around the globe, the Russell 2000 Index also appears very expensive on

a number of valuation metrics.

Experience Insight Impact

Some of the Valuation Gap Has Begun To Correct This Year…

4

The S&P 500 is +4.1% YTD

While the Russell 2000 is -3.1%

The Russell 2000 is trailing the S&P 500 by ~720 basis points this year. From its 2014 peak, the Russell is down 6.95%.

Experience Insight Impact

The Valuation Correction May Not Be Over...

5

• Even though small-cap stocks have underperformed so far in 2014, we believe the valuation correction may not be over. As we have seen this year, small-caps can underperform at the same time larger cap indexes are reaching new highs.

• Using trailing operating earnings, small-caps are still selling at a 19% valuation

premium relative to large-cap peers. Over the last 30 years, small and large-caps have traded at P/E parity, highlighting the valuation gap that still exists.

• At current prices, we would caution investors as we anticipate some level of mean reversion could continue to occur.

Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy.

Experience Insight Impact

Disclaimer

6