The fed, trump... and small caps

  The Fed, Trump… and Small Caps Dear reader, Small-cap stocks are starting to gain some steam… Through Friday, the iShares Russell 2000 ETF (IWM) has greatly underperformed the larger indices. It’s up a modest 14% over the past year. Meanwhile, the Invesco QQQ Trust (QQQ) has gained 31% and the Vanguard Mega Cap Growth Index Fund (MGK) is up 35%. But that narrative has flipped in the last month. The iShares Russell 2000 ETF has more than doubled the performance of the exchange-traded funds (ETFs) that concentrate on much larger companies over that timeframe. There are several reasons for this flip – and they’re not short term in nature. That suggests that this outperformance is just the beginning… The first – and most important – factor is the Federal Reserve. The central bank is getting very close to lowering interest rates for the first time since March 2020 in the midst of COVID-19 lockdowns. Lower interest rates are a good thing for small caps – more so than any other asset class. Slightly more than half of the companies that make up the Russell 2000 are profitable. That means that nearly half are losing money and often have to go to the capital markets to borrow cash. Lower interest rates make that easier and less costly. Another factor is the possibility that former President Trump wins the November election. The odds of Trump re-entering the White House are around 65% following the assassination attempt on Saturday. When combined with more Democratic politicians calling for President Biden to withdraw from the race, those odds get even higher in my opinion. But let me be clear… Nothing is certain in politics. As investors, we must simply play the odds. Why would a Trump presidency be good for small caps? Let’s consider historical trends. In the three months after Trump beat Hilary Clinton in the November 2016 election, small caps outperformed the mega-caps by almost double. That could certainly happen again. Trump has laid out a fairly transparent view on certain economic topics should he win this November. He has touted lowering corporate taxes and creating a more business-friendly environment by lowering regulations that tend to hurt small corporations more than their larger peers. Another potential game changer for the economy and U.S.-based companies would be huge tariffs on imports – specifically on China. Trump has discussed a flat 10% tariff on all imports and one as high as 60% on imports from China. This would allow smaller U.S.-based firms to compete with the lower overhead costs of producing goods in China. The election is still more than 100 days away. A lot can change in that time. But as long-term investors, we must take into consideration what a second Trump presidency would look like for the economy and stocks. Right now, that potential is just another reason to expect that small caps will take off in the months ahead. Here’s to the future, [McCall's Signature] Matt McCall Editor, Market Insights [Check Out My Latest Podcast]( The Crypto Fear & Greed Index has fallen to a level it hasn’t seen since 2023 when Bitcoin (BTC-USD) was trading at just $17,000. Today, it’s worth $57,000. Is now the time to panic? I don’t think so. On the [latest episode of the SteadyTrade Podcast]( Tim Bohen and I discuss the recent pullback in the world’s largest crypto and explain why we expect it to be short-lived. Several potential catalysts are on the horizon that could send Bitcoin and the broad crypto market higher. Those combined with the “extreme fear” reading in the Crypto Fear & Greed Index indicate that now could be the right time to start adding exposure to this asset class. [Check out the podcast to learn more.](   © 2024 Centurion Publishing 13809 Research Blvd, Suite 500, Austin, TX 78750   *Results are not typical. Past performance does not indicate future results. All investing carries risk. Our Privacy Policy, along with our Term & Conditions, governs your use of this site. By using our site, or by accepting the Terms of Use (via opt-in, checkbox, pop-up, or clicking an email link confirming the same), you agree to be bound by our Terms & Conditions and our Privacy Policy. If you have provided personal, billing, or other voluntarily provided information, you may access, review, and make changes to it via instructions found on the Website or by replying to this email. 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