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It was an uneven day in the market yesterday. But large-caps, as represented by the Dow, were down for the day, while small-caps, as represented by the Russell 2000 Index, were up.
Trade fears again weighed on stocks. But the markets showed their resilience once again.
But I should note the stark contrast between the behavior of large-caps and small-caps. I think all stocks look great right now. But small-caps do have a few distinct advantages.
For one, the corporate tax cuts are likely to have a greater impact on small-cap companies. Why? Because many larger companies employed complex strategies to reduce their effective tax rate down to the mid-twenties even though the actual tax rate was 35%. But many smaller companies did not have the resources or the opportunities to do that and were stuck paying a much higher effective tax rate.
So now with the corporate tax rate at 21%, those smaller-cap companies will see a significant tax savings and they won't need to employ a team of lawyers and accountants to do it. That means bigger EPS gains. And that money will likely be used to fund their growth. Add in the individual tax cuts and that means more people spending more money which means more sales. And again, with each dollar in sales being worth more, a larger percentage will flow to the bottom line.
The other advantage small-caps have over large-caps stocks right now is less potential downside exposure if trade tensions heat up. Why? Because smaller-cap stocks, in general, have less international exposure. Since smaller-caps generally do a larger portion of their business domestically, foreign tariffs will take a smaller toll on their sales.
And for those that don't have any foreign sales, the trade tensions have no impact on them. If anything, the higher cost of imported foreign goods into our country will only serve to make their domestic goods even more attractive.
These are two of the overriding themes underpinning small-cap stock right now, and why they have been leading the market this year, and why they should continue leading the market in the foreseeable future.
Remember, buy the dips and buy the rallies.
See you tomorrow,
Kevin Matras
Executive Vice President, Zacks Investment Research
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It was an uneven day in the market yesterday. But large-caps, as represented by the Dow, were down for the day, while small-caps, as represented by the Russell 2000 Index, were up.
