Small caps will lose the Trump swelling, because the increased strength will decrease
by Louis Krauskopf
NEW YORK (Reuters) – A corner of the U.S. stock market that is expected to benefit from Republican policies is stumbling as investors look for assets that have been flashed by Donald Trump’s presidency.
Shares of smaller U.S. companies have come under pressure, with the smaller Russell 2000 last week showing a 10% correction from its November high. The S&P 500, a benchmark of large companies, has fallen less than 3 percent in that time.
Trump, who will be inaugurated for his second term on Monday, is expected to support an agenda that encourages domestic economic growth, which will boost demand for small-cap stocks.
But the group has faced a serious headwind in recent weeks: the prospect of higher-than-expected interest rates, which would increase borrowing costs, which would hit smaller companies particularly hard.
“With more pro-growth policies, small caps will theoretically do better as the economy strengthens,” said Keith Lerner, associate chief investment officer at Truist Advisory Services.
“You’re going to have this tug of war,” Lerner said. “On the one hand, strong growth should be good for small capital. On the other hand, high interest rates are negative.”
Low prices and stocks got some relief from buoyant inflation that calmed rising Treasury yields this week.
The focus on small caps comes as investors look for “Trump trades” with room to run.
The overall stock market has given up some gains since Trump’s Nov. 5 victory, after investors showed interest in his pro-growth agenda, which broadly favors equities. The S&P 500 rose 3% after the election.
Some of Trump’s trade deals continue to flourish. Shares of Tesla, led by Trump supporter Elon Musk, have gained more than 60% since Nov. 5. Bitcoin is more than 40% expected to benefit from a friendly crypto regulatory environment.
But small caps are back. The 2000 Russell index rose nearly 6% the day after Trump won. Later in November, it hit its highest closing level in three years. Now, after the election, the indicator has changed a little.
Expectations of fewer interest rate cuts this year dampened sentiment for small caps, with the Federal Reserve in December It has raised its inflation forecast by 2025 and plans to reduce it.
Treasury yields rose. This week, the 10-year yield hit a 14-month high.
“Smaller companies tend to have more debt burdens…so it’s a bit of a cold water thing for them not to be able to keep track of low interest rates,” Yung-Yuma said. Investment Officer at BMO Wealth Management.
