Small Caps and Trump’s Potential Victory
Investing.com — A Trump victory could drive hedge fund investors toward small caps, which have recently been tracking Trump’s betting odds in October, according to a report from RBC Capital Markets.
Historical Precedent
This trade exhibits a historical precedent, with small cap positioning surging in 2016, 2017, and 2018 amidst optimism following Trump’s win, corporate tax cuts favoring smaller companies, and the US-China trade war.
Recent Market Movement
Small cap futures climbed higher on Tuesday night as election results rolled in, with the Russell 2000 index increasing by 5.8% by Wednesday.
Strategists at RBC noted that a key question for investors on Wednesday was how much further small caps might rise. They pointed out that positioning and sentiment might already be somewhat stretched, with Russell 2000 futures close to highs seen in 2016, 2017, and 2018, based on the latest CFTC data.
Monitoring P/E Ratios
The strategists recommended monitoring the Russell 2000's median price-to-earnings (P/E) ratio, which stood at 16.7x as of Tuesday, in comparison to previous peaks of 18.9x in 2016, 19.7x in 2017, and 17.6x in 2018. This indicates limited potential for further gains.
> “There’s not a ton of room left, but likely some even after Wednesday’s big move,” the strategists wrote.
Past Performances
RBC observed that small caps outperformed large caps for a time following both Trump’s 2016 win and Biden’s 2020 victory, though these rallies were relatively short-lived. The 2016 outperformance peaked about a month after the election, followed by two shorter rallies in 2017 and 2018, whereas the 2020 rally lasted about four months.
Intriguingly, both periods of small cap strength were marked by rising 10-year Treasury yields.
Future Projections
Trump is set to return to the White House for another four-year term, alongside his vice-presidential pick, Senator JD (NASDAQ:JD) Vance of Ohio.
NBC News projects that Republicans are likely to reclaim majority control of the US Senate in 2025, with at least 51 seats secured in the 100-member chamber by January when the new Congress is sworn in.
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