Small Cap Stocks Post New Highs
One asset class has rebounded to new all-time highs — U.S. small cap stocks.
After a bullish 2017 and hopes of a continued global equity melt up, 2018 has instead reintroduced market volatility. Despite global market volatility, U.S. small cap stocks have rebounded to new all-time highs.
Factors influencing the success of U.S. small cap stocks
So what factors has caused this success versus larger capitalization stocks?
Compared to large cap stocks, small cap stocks tend to do better in strong economic cycles. The first half of 2018 has been just that, and we expect more of the same in Q3 and Q4.
Small cap companies benefited most from the deep corporate tax cuts as most of their sales take place domestically resulting in higher tax rates when compared to their larger multinational peers.
The domestic focus of most of these smaller companies makes them less vulnerable to the ever-changing trade talks and tariffs between nations. Domestic sales generate all of their revenue and they export minimal goods. If anything, retaliatory tariffs could boost earnings of smaller companies with a domestic focus for the remainder of the year.
Targeting small cap stocks
The small cap premium is one we explicitly target in our portfolios. Given current market conditions, we see great opportunities for this asset class. Please refer to Evidence Based Investing for a more detailed look at our investment process.