This year is shaping up to be great for small stocks, especially if President Donald Trump continues to strengthen his anti-globalist stance.
The Russell 2000, an index which is comprised of small cap stocks, mostly outperformed its larger-cap counterparts. The recent outperformance comes in wake of Trump’s announcement to implement steel and aluminum tariffs, which could have a large effect on both the domestic and global economy.
Many large-cap companies take their business overseas. This puts them at risk to face retaliation from countries such as China. Small-caps tend to keep their business domestic, and thus will be less exposed to counter actions from foreign entities.
“The protectionist agenda will be better for small-caps relative to large-caps,” says Dan Miller, a director of equities at GW&K investment. He added “I would recommend investors buy into small-caps. It’s a good time to get into those names.”
The tariff announcements were first made March 1st, and in the following week Trump signed two proclamations. These proclamations add a 25% charge to imported steel, and a 10% charge to imported aluminum. Overall, the U.S. tariffs will be added to around $50-60 billion in Chinese exports.
Canada and Mexico will be the only countries exempt from these taxes. However, other counties have been discussed as possibly being added to the tariff exemption list.
The Chinese government retaliated by saying it would subject the U.S to $3 billion in tariffs, which hit pork, aluminum pipes, apples, steel, wine, and more. However, economists and experts estimate that Chinese retaliatory efforts against the U.S. could eventually be comparable to the $60 billion tariffs that President Trump has imposed.
Aside from tariffs, some investors noticed small-caps may benefit more from the recent tax cuts. This is also due to the fact a larger portion of their business is domestic.
Not all strategists share the same sentiment, however. Steven DeSanctis, and equity strategist at Jefferies, pointed out that many small-cap companies act as suppliers for large cap companies. “For example, if Boeing is impacted by tariffs, then the companies that sell parts to Boeing will get crushed,” he said. Over the past 3 years, the S&P 500 is up about 34%. In the same time period, the Russell 2000 rose 28.6% in value.
Article Written In Part By: Frank Marino-Moore