After the election of Donald Trump, U.S. small-cap stocks saw their prices explode upward on the hopes that tax and regulatory reform would boost performance. But can the hype match reality, and if it does, has all the opportunity already been priced in? Robin Wigglesworth writes in the FT:
US small stocks guru Henry Ellenbogen is concerned that the ferocious post-election equity rally could unravel unless the economy accelerates sharply to justify the frothy valuations, warning that most gains were powered by fickle inflows into exchange traded funds.
So-called “small-caps” — or smaller capitalisation stocks, midsized companies whose heft falls short of warranting inclusion in flagship equity market indices like the S&P 500 — have outshone large-cap stocks since Donald Trump’s victory in the presidential election.
The rally has been driven by expectations of more aggressive, inflationary fiscal spending and large-scale corporate tax cuts, which benefit smaller, largely domestic companies that cannot lower their effective tax rates through overseas legal subsidiaries. Moreover, they are largely insulated from the stronger dollar.
Although the Russell 2000, home to small-cap stocks, has failed to make a new high since early December, its almost 14 per cent advance since the US election is close to double that of the S&P 500.
Read more here.
Jeremy Jones, CFA
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