Small Cap Resurgence...
That's the historic post-Election Day story of financial markets. Since Trump's victory:
- Russell 2000 is up +15% (to +17.5% year-to-date)
- Russell 2000 Value (IWN) is up +13.2% (to +25.2% YTD)
This stands in stark contrast to pre-Trump victory small cap performance, writes Hedgeye CEO Keith McCullough in today's Early Look.
"Yep, for the week ended Friday November 4th, 2016 the Russell 2000 was -2.0% at +2.4% YTD, down -10.3% from what used to be its all-time closing high of 1295 established all the way back during the rate of change peak of the US economic cycle (July 2015). Then, Trump happened."
What's Changed?
The Russell 2000 is a U.S. domestic-oriented index (with about 20% of sales coming from abroad) so the U.S. Dollar index's +3.4% bump since Election Day certainly helped. In short, the Russell 2000 loves #StrongDollar, Strong America.
The small cap index also has a few other characterics that benefited from the Election Day pop in equities:
- Small Cap bias (vs. Large Cap) – strong dollar hurts multinational companies because they have to convert foreign profits to a relatively stronger dollar; it also hurts U.S. exporters, as foreigners must pay relatively more for U.S. goods
- Value vs. Growth bias – benefit from what financial markets are currently pricing in, growth picking up
- Heavily-Weighted to the Financials (not Healthcare) – similar to explanation for "value vs. growth," when economic growth pick up Financials stocks typically rally before Healthcare
In short, the post-election small cap resurgence equates to a resurgence in U.S. growth. We're still skeptical about whether growth is actually picking up and have advised investors to seek shelter in cash and tentatively take on U.S. equity exposure.
(For more on our U.S. economic outlook, click here and here.)
