As stated in our fourth quarter 2017 commentary, we believed the tax cuts would benefit small-cap stocks. This benefit has been the case for some names following recent results, but not all companies. We also stated in that commentary that since several companies have operations around the world and some have deferred tax assets that need to be adjusted or written down, the adjustments to earnings estimates is not simple. This pre- diction has turned out to be the case across the small-cap universe after the recent round of reports. As we said in the first quarter commentary, the market was a bit of a Jekyll and Hyde type of period, which was characterized first as low volatility and momentum to explosive volatility and fundamental driven market. We are now seeing an even different kind of market, which we will discuss later in this commentary.

Volatility has certainly increased in 2018, but net results is that smaller stocks have been the leaders. As can be seen in the table below, small stocks beat large stocks and micro-cap stocks beat small stocks. With the uncertainty of the Tariff impact on the economy and strengthening dollar, investors grew more interested in placing bets on smaller stocks during the past quarter. We believe these two factors drove the superior performance for small- and micro-cap stocks in the second quarter.

With a strong U.S. economy, one would think value would outpace growth stocks, but it was a mixed performance for large stocks versus small stocks. Value stocks outperformed growth stocks for small- and micro-cap stocks, but the degree was very modest. The table below shows that growth bested value for large stocks by a wide margin. As measured by the Rus- sell 1000 Growth and Russell 1000 Value Index, growth stocks outpaced value stocks by 4.58% during the second quarter. The main reason that growth outperformed was the continued strength of FAANG stocks (Facebook, Apple, Amazon, Netflix and Google). The breadth of the overall market remains very mixed. As measured by the Russell 2000 Value and Rus- sell 2000 Growth Index, value stocks modestly outperformed growth stocks during the second quarter, but growth stocks remained solidly ahead for the year-to-date period. The results are similar for the Russell Microcap Value and Russell Microcap Growth Indexes, but the margin of outperformance for growth stock is only modest for the year-to-date period.

Past performance does not guarantee future results.

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