Small caps have had a good year so far, but the reasons investors favor this asset class may not explain its outperformance, according to a recent article in The Wall Street Journal.
This year’s gains, the article says, are due to the fact that small caps are more domestically-focused and are therefore enjoying more of a benefit from the corporate tax cut than their larger peers. They are also poised to benefit from the recent pickup in the U.S. dollar.
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But the article points out that there are other factors at play. “For one,” it argues, “some of the biggest stocks weighing on the S&P 500—Walmart, AT&T, Comcast and Wells Fargo—are mostly domestically focused companies, meaning they should be getting the same bounce as small caps. But they are all being hit by company- or industry-specific issues.”
The composition of the indexes should also be considered, the article points out, noting the example of healthcare stocks which are up less than 1% in the S&P 500 but up 27% in the biotech-heavy S&P 600. The S&P 500 index, it explains, is dominated by major pharmaceutical companies, which are challenged by lackluster growth (and on the prowl for biotech acquisitions).
The article concludes that small-cap stocks didn’t rally as much as big companies last year in anticipation of the tax cuts and that, “investors who worry they missed out on the small-cap rally might find they still have time.”
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