Weekly Wrap: Market Uncertainty, Stocks to Watch, and Top Small-Cap Funds

Market Uncertainty

Uncertainty about the newest coronavirus variant’s impact on the economic recovery has roiled the stock market. In addition, comments from Federal Reserve chairman Jerome Powell that it’s time to stop referring to inflation as “transitory” and that the Fed’s tapering may happen sooner than expected have only further jostled stocks.

Some say that investors should tune out market volatility and maintain a long-term perspective. But others, including Morningstar director of personal finance and retirement planning Christine Benz, advise that there are things that investors can do to take control of their portfolios during turbulent times. We’ve pulled together some of Christine’s top ideas in our Guide to Market Uncertainty.

Those investors who typically “buy the dip” no doubt have their watchlists at the ready when stocks tank. Don’t have a watchlist? No problem. Three high-quality, well-run companies whose stocks are worth considering on pullback: Coca Cola (KO), Dominion Energy (D), and Roche (RHHBY). My colleague Jakir Hossain shares more ideas in 3 Wide-Moat Stocks on Sale After the Omicron Sell-Off.

Stock of the Week

On Monday, Twitter (TWTR) co-founder Jack Dorsey stepped down as CEO, effective immediately. Parag Agrawal, the firm’s chief technology officer, now fills the CEO role. We didn’t make any changes to our $58 fair value estimate, nor to our Morningstar Capital Allocation Rating or Morningstar Economic Moat Rating as a result of Dorsey’s departure, says senior analyst Ali Mogharabi.

“In our view, the firm will be better positioned to increase user monetization and expand margins under Agrawal as Dorsey could not focus mainly on Twitter’s future when also leading the narrow-moat Square (SQ),” Ali says. Only time will tell whether Agrawal can foster the type of innovative culture that Dorsey did, though. As of this writing, we think Twitter’s shares are undervalued.

(Dorsey had a busy week: On Wednesday, Square announced it is changing its name to Block. No matter what you call the company, its stock is outrageously overpriced today, according to our metrics.)

The Best Small-Cap Funds

As we enter the year’s final stretch, many investors’ thoughts turn to portfolio matters. We consider what did well for us this year, what didn’t, and where we should make some changes.

For many, small-cap stocks continued to disappoint this year. Oh sure, the Morningstar US Small Cap Index is up about 11% this year as of this writing–which is nothing to sneeze at. But the Morningstar US Large Cap Index is up more than 20%. Despite some changes in leadership during the course of the past 12 months, large-cap stocks have, in general, dominated.

Contrarian types–or those who find their exposure to small-cap stocks otherwise lacking–can find some small-cap funds to investigate further in my Our Picks column, which highlights 11 active and passive mutual funds and exchange-traded funds that earn our highest Morningstar Analyst Rating.

Diamond Hill Small Cap (DHSIX) is just one of the gems on the list. Morningstar’s Dan Culloton, who follows the fund, points out that managers Chris Welch and Aaron Monroe look for stocks trading below their intrinsic values, but they’re not deep-value types; rather, they prefer business with stable cash flows, good managers, and sturdy balance sheets. “Buying the shares of decent businesses when their prices are depressed, as Welch and Monroe attempt to do, has delivered good risk-adjusted returns over time,” says Dan.

To Thine Own Self Be True

My colleague Sachin Nagarajan wrote an article this week about lessons he learned from ARK Innovation ETF (ARKK). What I enjoyed most from Sachin’s investment confessional was his growing awareness of what matters to him as an investor. Not to steal his thunder–please read his article!–but Sachin has discovered, despite his long runway to retirement, he isn’t a fan of volatility and prefers “forget-them” investments. A while ago, Christine Benz also shared some personal investing preferences she has developed over time in My ‘Too Hard’ Pile Is Pretty Big. What are your preferences? Have you articulated them in any way? Doing so may help you declutter your portfolio or uncover holdings that may no longer mesh with who you are as an investor today. An exercise to consider before you review your portfolio at year’s end, perhaps!

—Susan Dziubinski

Editor’s Picks

Your Financial To-Do List for December
The end of the year is a great time to review your portfolio.

Pros and Cons of Donor-Advised Funds
Donors benefit from an immediate tax deduction, tax-free growth, and investment flexibility.

We’re Still Bullish on U.S. GDP Growth
The third quarter served as a reminder that the economic recovery is far from over.

The Best Small-Cap Funds
These small-company-focused mutual funds and ETFs all earn Morningstar Analyst Ratings of Gold.

3 Wide-Moat Stocks on Sale After the Omicron Sell-Off
These high-quality names were caught up the market downdraft.

For the Bond Market, This Time May Be Different
Will the skeptics at long last be vindicated?

Should Your Retirement Portfolio Withdrawals Vary With the Market?
We delve into the trade-offs associated with flexible withdrawal systems versus those that deliver steady cash flows.

Giving in 2021
Whether you can give a little, or a lot, to charity, you can maximize both your donation and your tax write-off.

Yes, RMDs Can Improve Your Portfolio
RMD-related tax bills hurt, but surgical pruning of problem positions can help you raise cash and reduce risk.

Manager Question of the Month: How Do Managers Approach Boom-or-Bust Biotech Stocks?
Benchmark rebuild in June put pressure on some small-cap managers.

6 Qualities of Great Index Funds
To understand your fund, get to know its underlying index.

Why Did a Star Manager Take His Boutique Fund Firm Public?
After stunning growth and a successful IPO, what’s next for Rajiv Jain’s GQG Partners?

2021 Fund Flows Winners and Losers
Some asset managers did a better job than others attracting new investors this year.

The Best and Worst New ETFs of 2021
There were a record number of new ETFs launched in 2021. These are our selections for the year’s best and worst.

Funds with Big Energy Bets
These diversified funds have gone all-in on energy stocks, and that has (mostly) given them a boost in 2021.

Markets End November on a Low Note, but ETFs Stack Inflows
ETFs hauled in $73.1 billion of fresh inflows despite markets’ sour end to November.

Why Exxon’s Oil and Gas Focus Makes Sense
The strategy won’t win praise from environmentally oriented investors, but Morningstar’s analyst thinks it’ll likely be more successful–and less risky.

Demand for Electric Vehicles Accelerates
Cost and performance parity will drive consumer interest.

The FAANG Market Is Fading
The impact of the largest stocks on the market has lessened and that could be good news for investors.

Why Pfizer Is Formidable
Morningstar’s analyst says there’s much more to Pfizer’s products than COVID-19 vaccines and treatments.

Better Stocks Than Bonds in Retirement
A history of asset allocation for retirees.

Ramit Sethi: How Can Couples Make Peace Over Money?
The personal finance expert and author on how early money experiences shape people’s lives and relationships.

How to Succeed in Practice With Alternative Investments
Savant Wealth Management CIO Phil Huber dives into the challenges advisors face when working with alternative investments and how that drove him to write his new book.

How Can Advisors Help Assemble a Secure Retirement Income Solution?
Advisors can play a key role in popularizing annuities and providing greater retirement security.

3 Lessons I Learned From ARK Innovation ETF
ARK Invest’s flagship offering might not be for me–and that’s OK.

Ten Questions With North Growth’s Erica Lau
‘Stay disciplined and focus on the long term.’

Fund Investors Seek Inflation Protection
Money is flowing into funds that provide a hedge against inflation.