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Good Things Come In Small Packages


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What's going on?

US small capitalization (a.k.a. “small cap”) stocks – typically companies with a market value of less than $1 billion – continued their ascent on Tuesday. They’re up by almost 10% this year compared to larger stocks’ 4% average rise.

What does this mean?

There are a handful of potential reasons why investors have bought smaller stocks, helping them to their best six-week period since 2016 – including the US government’s corporate tax reform and the country’s strong economic growth so far this year. These factors help all US companies, but smaller companies in the US tend to be domestically focused (or have limited international operations) – which means that tax savings, for example, impact all of their business, not just part of it – resulting in a bigger boost to current profits than for some larger companies.

Why should I care?

For you personally: Choose your small cap investments wisely.

Partly because of their size, small cap stocks often move in the same direction at the same time (i.e. they’re correlated) – so some investors tend to buy and sell this group together in a basket (a.k.a an index). Two of the biggest small cap indices in the US are the Russell 2000 and S&P 600 – but they don’t contain exactly the same stocks, so they perform differently. While S&P’s small cap index is up almost 11% this year, Russell’s is only up 9%.

For markets: Large cap stocks have lumbered.

Large US stocks are having a rocky 2018, partly in response to investors’ concerns about a global trade war. Some US steel stocks have risen, probably because they stand to benefit if it’s more expensive for Americans to buy steel from outside the US. But these steel companies are typically smaller than the likes of Boeing and Caterpillar – both of which use a lot of metal to build their products, and whose shares have fallen in anticipation of rising costs.

Originally posted as part of the Finimize daily email.

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