The Trend

The Trump Presidency: The Stocks To Own

Sometimes, size does matter.

For quite some time, small cap stocks were left for dead thanks to a number of factors, including a crash in commodities. Then, for most of 2016, traders ignored them again.

But by the time 2016 ended, small caps became the biggest winners on the market.  And that’s likely to continue well into 2017 with Donald Trump in the White House.

Sure, the common fear is that smaller cap companies are far more volatile, making them riskier, and not really worth the gamble in the long run. But the reality is that that many of them have been generating above-market returns with lower risk.

In fact, in 2016, the Russell 2000 gained 23%, as the S&P 500 picked up just 13%.

The Vanguard S&P Small Cap 600 Growth ETF gained 27%.  And like we noted, that could continue well into the New Year. In fact, many analysts advise investing in small caps again this year, as beneficiaries of new Trump policies.

For example, analysts at the Bank of America will tell you that small caps are typically less exposed to the potential challenges arising from increased protectionism and trading restrictions.  Plus, as a result of unstable global economic conditions, U.S. small caps are being recognized as the sweet spot for safe allocation.

Meanwhile, large cap stocks with an international footprint could be negatively impacted by any attempts to renegotiate global trade agreements.  Some could even find themselves subject to penalties if new laws are enacted to discourage business outside of the U.S.

Trump has already threatened tariffs on companies that move work abroad.

Proposed infrastructure spending, fewer regulations for businesses, and lower tax rates could send many small caps higher, too.  Reportedly, small cap earnings could jump 10% to 20% going forward, especially if their tax rates fall in a new range of 20% to 25%.

In short, this could be another substantial year for these stocks.

Fund flows show interest in small caps, as well.  In fact, according to Morningstar, SDPR S&P 500 saw inflows of $7.5 million in November.  But in second place was the iShares Russell 2000 ETF with an inflow of $6.2 million. 

That’s a bullish sign that investors are excited about smaller companies. 

While tempting to short small caps after such a run, sit tight.  The uptrend could possibly continue for the foreseeable future.