Trump’s Presidency: A Mixed Bag for Small-Cap Stocks
As the US stock market adjusts to a new presidential term, investors are seeking assets that will thrive under Donald Trump’s leadership. One sector expected to benefit from his policies is small-cap stocks, but they’ve been struggling lately.
A Promising Start, Followed by Disappointment
The small-cap Russell 2000 index initially surged nearly 6% after Trump’s election victory, hitting its highest closing level in three years later in November. However, it has since given up those gains, leaving it little changed since the election. In contrast, the S&P 500, which tracks large-cap companies, has risen 3% over the same period.
The Interest Rate Conundrum
One major headwind for small-cap stocks is the prospect of higher interest rates, which could increase borrowing costs and disproportionately affect smaller companies. The Federal Reserve’s decision to raise its inflation estimate for 2025 has led to a decrease in expected interest rate cuts, causing Treasury yields to surge. This has dampened sentiment for small caps, as they tend to have greater debt loads.
The Trump Effect: A Double-Edged Sword
While Trump’s pro-growth agenda and reduced regulations should benefit smaller, US-focused companies, his favoring of tariffs could disrupt supply chains and cause problems for these businesses. Additionally, small-cap indexes are more heavily weighted towards financials and industrials, sectors that are sensitive to higher rates and inflation.
A Catch-Up Opportunity?
Despite the challenges, small-cap bulls are hoping for a rebound. The S&P 500’s 50% gain over the past two years is more than double the rise for the Russell 2000, leaving room for small caps to catch up. However, this will likely require a favorable interest rate environment.
The Verdict: A Tug of War
Investors are torn between the potential benefits of Trump’s policies for small-cap stocks and the negative impact of higher interest rates. As the economy grows stronger, small caps should theoretically perform better, but rising borrowing costs could offset these gains. One thing is certain: small-cap stocks will be closely watched in the coming months as investors seek to capitalize on the opportunities presented by Trump’s presidency.
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