Do Tariffs Really Help Small Caps?

Throughout most of January and February, small caps lagged their large cap counterparts. However, things took quite the turn on March 1, 2018 after President Trump kicked the month off stating that his administration would impose tariffs on steel and aluminum imports. The announcement led to the Russell 2000 Index (a small cap index) seeing its best five-day rally relative to the S&P 500 Index since right after the U.S. election in November 2016.

To put things in perspective, between March 1 and March 7, the Russell 2000 gained 3.6%, while the S&P 500 added 0.5%. That marks the best outperformance over a five-day [trading] period for small caps since November 10–17, 2016. Besides investors’ concerns surrounding the prospect of seeing the worst trade war since the Great Depression, the head of the National Economic Council stepped down during those five days as well. Once again proving why strong fundamentals can trump many worries. But, why did small caps just soar?

Well, small cap companies are more domestically focused by virtue of their size and don’t generate nearly as much revenue from overseas operations as larger companies do. In other words, should there be a tit-for-tat, back and forth with tariffs, small caps could be one of the winners, as they are insulated from this.

“Coming into 2018 we really liked small caps. They tend to do better when the economy is strong and corporate tax reform was a major tailwind for the group as well. However, they lagged earlier in the year but finally started to move on news of the impending tariffs. We think the group still has the potential to do well and may be a place for suitable investors to find some alpha in 2018,” explained Ryan Detrick, Senior Market Strategist.

Lastly, from a technical perspective, the Russell 2000 recently pulled back to support levels from this upward sloping trendline, before bouncing (see the chart below). Overall, this is a very nice technical picture and one may suggest the bull market in small caps isn’t over just yet.


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