U.S. small-caps gained momentum this week as trade tensions between Washington D.C. and Beijing took a turn. President Donald Trump called for a new round of tariffs on $200 billion in Chinese goods. Chinese officials countered with tariffs on U.S. car makers, farmers and industrial companies.
“Smaller companies have some natural hedges against risks like trade,” Tim Courtney, chief investment officer of Exencial Wealth Advisors, told the WSJ.
Small-Cap Outlook is Positive
Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data.
The strengthening outlook for the U.S. has also helped lift the U.S. dollar against its basket of peers. Consequently, given the stronger U.S. dollar, large multinational U.S. companies will find revenue lowered when converted back to an appreciating USD. According to FactSet, S&P 500 companies generate 38% of their income overseas, whereas the S&P Small Cap 600 companies generate about 20%.
Lastly, small business profitability reached its highest reading since records began in 1973 as a result of the U.S. tax changes last year, according to the National Federation of Independent Businesses.
For more information on small-capitalization stocks, visit our small-cap category.