By Lewis Krauskopf
NEW YORK (Reuters) – As investors seek assets that can shine under a Donald Trump presidency, one corner of the U.S. stock market expected to learn from the Republican’s policies has been stumbling.
Shares of smaller U.S. corporations have been under pressure, with the small-cap Russell 2000 last week marking a ten% correction from its November highs. The S&P 500, the benchmark for large-cap corporations, declined lower than 3% in that point.
Trump, who can be inaugurated for his second term on Monday, is anticipated to back an agenda promoting domestic economic growth, increasing the appeal of small-cap stocks.
However the group encountered a severe headwind in recent weeks: the prospect of upper rates of interest than previously expected, which stand to boost borrowing costs that hit smaller corporations particularly hard.
“With more pro-growth policies, small caps are likely to do higher in theory when the economy is stronger,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.
“You almost have this tug of war,” Lerner said. “On one side, stronger growth needs to be good for small caps. On the opposite side, high rates of interest are negative.”
Small caps and equities broadly won some relief this week from an encouraging inflation report that calmed surging Treasury yields.
The deal with small caps comes as investors search for “Trump trades” which have room to run.
The general stock market has given up some gains since Trump’s Nov 5 victory, when investors were enthused about his pro-growth agenda benefiting equities broadly. The S&P 500 is up 3% for the reason that election.
Some Trump trades proceed to thrive. Shares of Tesla, led by Trump backer Elon Musk, have gained over 60% since Nov 5. Bitcoin, which is anticipated to learn from a friendlier crypto regulatory environment, is up over 40%.
Small caps, nevertheless, have pulled back. The Russell 2000 index surged nearly 6% on the day after Trump’s win. Later in November, it hit its highest closing level in three years. Now the index is little modified for the reason that election.
An expectation of fewer rate of interest cuts this yr has dampened sentiment for small caps, with the Federal Reserve in December projecting less easing because it raised its estimate for inflation in 2025.
Treasury yields have surged. This week, the benchmark 10-year yield hit a 14-month high.
Smaller corporations “are likely to have greater debt loads…so not getting the follow-through with lower rates of interest is something that kind of poured a little bit of cold water” on hopes for small-cap strength, said Yung-Yu Ma, chief investment officer at BMO Wealth Management.