Updated with clarification
The coronavirus is dominating headlines and, most likely, will continue to do so for some time to come. The slowdown in economic activity as a result of the government policy response to it has cut a swath through many industries. With COVID-19 still widespread in many developed economies, it is not possible to analyze its effects in full at this point. All this comes on top of the devastating direct effect of the virus on the population in terms of illness and deaths.
However, it is quite possible that it will put pressure on some companies that have benefited from the interlinked combination of low interest rates and investors' search for yield. Turning to what may now seem like older than yesterday's news, up until the end of last year the U.S. was enjoying a lengthy period of economic growth, with the fourth quarter marking the 23rd consecutive quarter of expansion in GDP. Yet, the proportion of U.S. small-cap companies making a loss is well above the lows recorded in some similar periods in the past.
We believe that U.S. small cap continues to be an inefficient and attractive asset class with long-term upside potential, and that investors should consider a defensively positioned portfolio that includes well-researched companies with strong balance sheets, sustainable business models, and strong cash flows to support growth and dividend payments. These companies should provide good upside participation in rising markets, but hold on to value in periods of weakness.
In 2018, the latest year for which full data is available, 32% of companies in the small-cap universe were loss-making — point A on the chart below. But at a similar stage in earlier economic cycles, the percentage was lower: 18% in 1996 (point C), and 24% in 2007 (point B).