The Trend

Why Small Cap Stocks Could Soar Again

Sometimes, size truly matters.

For years, small cap stocks crashed and burned thanks to a number of factors, including a crash in commodity prices. But that’s quickly changing.

Since the start of 2016 and especially after the election, small caps have emerged as some of the biggest winners in the market. That could last well into 2017 – and perhaps longer – with Donald Trump in the White House. 

In fact, for 2016, small caps had an amazing year. The Russell 2000 for instance returned just over 21% growth, standing in stark contrast to a poor 2015.  Sure, there’s still a fear that smaller companies are far more volatile than larger cap stocks, which in turn makes them far more risky. But forget that fear. The reality is that small caps have and may continue to generate above market returns with lower risk. 

Even better, we love the fact that many small caps don’t get a lot of press attention. Not only does that keep the gems off the radar of big traders, it gives us the opportunity to buy before any of the big guys begin to wake up to the opportunities. 

Nowadays, as a recent of unstable global conditions, U.S. small cap stocks are being recognized as a sweet spot for asset allocation. And, with Trump’s economic policies likely to focus strictly on the domestic economy, small caps could benefit even more. 

Meanwhile, large cap stocks with an international footprint could be negatively impacted by 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.

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Trump has already threatened tariffs on companies that move work abroad, for example. Proposed infrastructure spending, fewer regulations for businesses, and lower tax rates could send many small caps higher, too. Many funds and institutional investors are showing interest in small caps, as well.

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. 

In short, small cap stocks offer some of the most explosive rewards, especially those involved in booming commodities, like copper, aluminum, and gold.

In fact, if you look at an aluminum stock, like $1.28 billion Century Aluminum (CENX), it’s already soared from a November 2016 low of $6.51 to $16. Wall Street heavyweights are just now waking up to the name.

While small cap stocks may carry a poor misconception, such stocks have been offering significant opportunity, especially with Donald Trump focusing on the domestic economy.