It seems that there are no stopping small-cap stocks. Expectations that the Trump administration will introduce industry-friendly, domestic-focused policies have helped small caps post record gains over the last month. This is why the category has set a frenetic pace ever since his surprise victory, easily outpacing the broader market’s gains.
Apart from a small dip last week, gains for this category have been more or less uninterrupted. Given the state of the economy and prevailing expectations about forthcoming policies, it is quite likely that such gains will continue into the New Year. Investing in small-cap stocks with superior fundamentals will make for a profitable choice even in 2017.
Best Monthly Gains for Russell 2000 in 5 Years
The Russell 2000 Index of small-cap stocks registered its best monthly gains since Oct 2011 in November. The index moved 11.2% higher over the month, outperforming the S&P 500, which gained 3.4%. While the Dow gained 5.4% last month, the Nasdaq notched up its highest gains since July, increasing 1.1%.
Gains for the small-cap index were largely attributable to a rally sparked off by the results of the presidential election. Additionally, the index registered its longest stretch of gains since Feb 1996 last month. This fifteen-session long stretch of gains ultimately came to a halt on Nov 25. At that point, the Russell 2000 had gained 12.7% since Nov 8, significantly higher than the S&P 500’s advance of 3.5% registered over the same period.
Trump Powers Small Caps Ahead of Others
Market watchers and analysts alike feel that while a Trump administration will be good for the broader markets, it will benefit small cap stocks even more. Most of Trump’s economic policies are likely to be focused on the domestic economy and will benefit small caps substantially more. Trump has promised to ease regulations, cut taxes and boost infrastructure spending.
With financials, healthcare and energy stocks making up the bulk of small caps, the category is likely to benefit the most from these measures. Additionally, small caps usually have the highest effective tax rates since larger internationally diversified corporations park a large share of their profits abroad. Additionally, Trump has pledged to renegotiate crucial trade agreements, which is also likely to benefit small caps.
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