2017: Anatomy Of A Small-Cap Junk Rally

Many clients have been asking us, “What happened to U.S. small caps in 2017?” Also, they’ve been asking us what has happened to quality-focused small-cap strategies.

2016 saw incredible performance. In 2017, the trend has completely reversed.

The U.S. Dollar, Interest Rates and Momentum (or Lack Thereof) of the Trump Agenda

To say the least, 2017 has been surprising thus far. Since the November 8, 2016, election of President Trump, the U.S. 10-Year Treasury note has hit 2.60% twice.1 As of this writing, it is below 2.35%. Many would have thought that the momentum of and excitement about President Trump’s plans would have led to higher interest rates, not lower ones. Small caps historically have responded well to a rising rate environment.

The U.S. dollar also has been weakening. A weaker U.S. dollar—don’t get us wrong—is (and has been) a boon to the earnings of U.S. large-cap multinationals. In 2017, one of the most exciting trends has involved the earnings of the S&P 500 Index, and we believe that a critical causal factor is the weakening of the U.S. dollar. Unfortunately, U.S. small caps do the majority of their business inside the United States, so their relative performance when measured against large caps is actually helped by a stronger, not weaker, U.S. dollar.

Finally, U.S. small-cap stocks tend to pay higher effective corporate taxes than do U.S. large-cap multinationals, which may leave a portion of their earnings outside of the United States to avoid paying taxes. After President Trump’s 2016 election, small-cap stocks went on a massive rally—the Russell 2000 Index was positive 15 days in a row.2 As the momentum behind corporate tax reform has seemed to wane for most of the year, small caps have underperformed large caps in the U.S.

Of course, these three factors have been discussed for the last nine months.

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *