Some of Donald Trump’s plans for the US economy may provide a big boost for small stocks. We think there are five compelling reasons for investors to take a closer look at this segment of the market.
Since Trump won the US presidential election a little more than a month ago, the small-cap Russell 2000 Index has surged some 15%, compared to less than 6% for the S&P 500 Index of large-cap stocks.
What’s going on? Investors are betting that a bevy of proposed Trump polices, including lower corporate taxes, repatriation of cash held offshore and looser regulation, and their likely effects (faster economic growth, higher interest rates, rising inflation), will disproportionately benefit small-cap stocks.
Our research points toward the same conclusion. But that doesn’t mean every small company will be a winner during a Trump presidency. His policies will have varying effects on different companies and sectors. Take regulation. Trump’s plan to relax some postcrisis financial rules is clearly good for bank shares. But repealing the Affordable Care Act could leave millions uninsured, raising costs for hospitals.
Investors will have to navigate plenty of twists and turns, and they will need a steady hand on the wheel. That’s why a hands-on approach that can identify attractively valued stocks with strong fundamentals is still critically important, in our view.
MORE CHANGE, MORE OPPORTUNITY
For investors, change can mean opportunity—especially when it comes to small-caps. They receive far less attention from analysts than their larger peers, and this neglect often leads to mispricing or misunderstood fundamentals. Today, the potential for both is even greater.