Post-election outlook bright for volatile U.S. small caps
STOXX 600 down 0.3%
French stocks underperform on budget worries
Wall St futures lower
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POST-ELECTION OUTLOOK BRIGHT FOR VOLATILE U.S. SMALL CAPS
U.S. small caps have held up well in the past 12 months, even as elevated volatility made the holding them unnerving and market timing and a steady hand important, according to Wolf von Rotberg, equity strategist at J. Safra Sarasin Sustainable Asset Management who takes a constructive view on the space.
In a note, von Rotberg highlighted that small caps more or less matched S&P 500 returns over 12 months, and even outperformed the index's equal-weighted version.
The S&P 500 .SPX is up 32.3% in the last 12 months and the S&P 600 small cap index .SPCY is up 30.4% according to LSEG Workspace - not much difference at all.
But while the S&P 500 climbed in a fairly stable manner, small caps saw significantly larger daily moves.
"Missing the best five days over the past 12 months would have led small caps to underperform by 17% vs large caps, while they only trailed by 1% if no days were missed," explains von Rotberg.
Two factors underpin his constructive outlook for this part of the market.
Firstly, rates are no longer a major headwind, having hurt in recent years due to small cap's heavier reliance on bank financing compared to large caps.
Secondly, cyclical data is supportive for small caps.
"For the first time since mid-2021, the NFIB component “availability of loans” has turned positive over 12 months, a measure which correlates well with the senior loan officer survey’s bank lending conditions for small firms," he writes.
Finally, small caps are beneficiaries of Trump’s policies, specifically potential corporate tax rate reductions, as well as being less sensitive to tariffs, given their smaller foreign exposure.
(Lucy Raitano)
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