Friday, April 21, 2017

Small Cap Stocks Regain Momentum

Companies with small market capitalizations have outperformed their larger peers so far this week, reviving a lapsed post-election trade as investors turn their focus to potential tax reform.

The small cap Russell 2000 Index has climbed 2.4% so far this week, outperforming the S&P 500′s 0.9% rise. The Russell 2000 was up 1.2% on Thursday, topping the S&P 500′s 0.8% rise, as Treasury Secretary Steven Mnuchin said the administration planned to release a tax plan “very soon.”

“We’re relieved to see small caps starting to improve versus large caps,” wrote  Jeff deGraaf, chairman and head technical analyst at Renaissance Macro Research, in a Friday research note. He described the recent relationship between the two as “a pendulum that swings from legislative reform to legislative stagnation, but at least it’s swinging.”

The period of out-performance took a breather on Friday, when the Russell was down 0.5%, more than the S&P 500′s 0.3% fall. Due to a glitch, the Russell 2000 didn’t update for the first hour of trading.

Small cap stocks, many of which are U.S.-centric and carry higher tax rates, were big gainers right after the election as investors bet those companies would reduce their corporate tax bills under a Trump administration. They were also thought to be more insulated from protectionist trade rhetoric.

Since the end of last year, they’ve lagged larger cap stocks as the time-frame for tax reform has been pushed back. Still, they regained some strength this week, with some saying there are indications small caps could be poised to continue out-performing.

“The high yield market still remains strong, which is generally a good indicator for small cap performance. We remain confident that small caps are still in an uptrend,” said Christopher Retzler, a small cap portfolio manager at Needham Asset Management. He said his fund added some small cap names earlier in the year as the sector under-performed.

April 21, 2017 at 10:32PM

from Ben Eisen