Investors Turn to Small-Cap Companies After Trump Victory - Reinhard Hofer

KITZBUHEL, Austria - Nov. 16, 2016 - PRLog -- Ever since the unexpected victory by Donald Trump in the presidential election on November 8, U.S. stock market investors have been winning big by thinking small.

While equities have risen broadly of late, both leading up to the election and especially after, the gains have been particularly pronounced for small public companies, which are seen as benefiting most under the new administration.

The S&P Small Cap 600 Index has climbed 8.8% since the close of trading on Nov. 8, the last trading day before the results were known. The Russell 2000 index, which comprises the smallest 2,000 stocks of the Russell 3000, which itself represents essentially the whole of the American equity market, is up 8.3% over the same period. Both have hit new all-time highs since the election.

To compare, the S&P 500, considered a proxy for large-cap stocks, is up 1.4% since Trump was elected. Splitting the difference was the S&P 400 Mid Cap Index up 5% since the close of last Tuesday. It has also hit a record since then.

Analysts cited a number of reasons for the small-cap outperformance, but the group's less-diverse geographic footprint was seen as a major contributing factor. Because small U.S. companies tend to have higher revenue exposure to the U.S. they are expected to both benefit from any improvement in domestic economic conditions while simultaneously avoiding any turbulence in the global economy.

"A lot of what Trump says, on lowering taxes and regulation, is pro-growth, but his rhetoric on trade is not," said Edward Smith, Senior Wealth Manager at Reinhard Hofer, the independent wealth management company headquartered in Austria. "If he goes about trying to increase tariffs or incites a trade war, that would favor small stocks, which are domestically orientated, at the expense of the multinationals that make up the S&P 500."

Components of the iShares Russell 2000 ETF, an exchange-traded fund that tracks the Russell 2000, get 79.1% of their revenue from the U.S.

For components of the SPDR S&P 600 Small Cap ETFthat figure is over 80%. SPDR S&P 500 ETF Trust components get 69.3% of their revenue from the U.S., while components of the SPDR Dow Jones Industrial Average ETF Trust, which tracks the Dow, get 57.6%.

Money has poured into the small-cap ETFs of late. The iShares Russell fund has seen more than $6 billion in inflows over the past week, with $2.14 billion in inflows in the past day alone. The S&P fund has seen inflows of $1.4 billion over the past week, but outflows of $411.4 million over the past day.

One of Trump's expected priorities as president is a massive influx of spending on U.S. infrastructure, a stimulus that would have an outsize impact on companies that focus on the domestic economy. While some multinationals, notably industrial giant Caterpillar Inc. have rallied on this thesis postelection, any upside such firms see could be tempered by issues that would hit small-caps less.

The recent rise in the U.S. dollar, which jumped to a one-year high on Monday, is one such threat. A stronger dollar can erode the profitability of multinationals through higher foreign exchange costs.

"Small-cap stocks either don't have to deal with foreign exchange issues, or they're mostly importers, which means a stronger dollar actually lowers their costs," said John Anderson, of Reinhard Hofer. "Meanwhile the dollar hurts multinationals on both the top and bottom line," he added, referring to both profitability and sales.

Anderson added that he expects reduced regulation, another cornerstone Trump pledge, though one he has yet to broadly detail, to have an outsize benefit on small names.

"Small-caps have been punished by overregulation because it is harder for them to absorb the impact of the regulation," Anderson explained. "Large companies are better equipped to deal with increased client costs, legal expenses, whatever. The prospect of this issue ending is why the Russell is outpacing the S&P by more than double over the past few days."

Reinhard Hofer offers wealth management services to private and institutional clients worldwide. More information can be found at http://www.reinhardhofer.com/