Since Trump’s election a year ago, the stock market has been on a spectacular rally. While gains are broad-based, small caps are clearly outperforming. This is especially true as the Russell 2000 index has gained 24% in a year compared with a gain of 21.3% for both the S&P 500 and S&P Mid Cap 400.
Trump trade resurgence with renewed hopes of tax reform in recent months has turned the fate of small-cap stocks, which were lagging in the first half of the year as Trump’s pro-growth policies were stalled or stuck in a political gridlock. This is because small caps with a median effective tax rate of 31.9% are the biggest beneficiaries of Trump’s tax cut plans. In comparison, the larger, multi-national companies on the S&P 500 pay a lower median effective tax rate of 28% while the tax rate for 30 mega-cap stocks on the Dow Jones Industrial Average is even lower at 23.8% (read: 5 Biggest Winners of Trump Trade Resurgence).
Notably, the Senate has passed the $1.4 trillion budget resolution that paves the way for tax cuts later this year or early next year. Additionally, the escalation of North Korea tension in August and September as well as political uncertainty in Europe following the vote in Catalonia has added to the strength in small-cap stocks. Notably, the small cap stocks are free from the clutches of any political malaise.
Further, growth in the U.S. economy has been accelerating with GDP growth expanding 3% annually in the third quarter following 3.1% growth in the second quarter. This represents the best back-to-back quarters of at least 3% growth since 2014. Unemployment dropped to the lowest level since December 2000 to 4.1%.
Americans also have an optimistic view of the economy with confidence hitting the highest level in almost 17 years. The Conference Board consumer confidence index jumped to 125.9 in October from a revised 120.6 in September. Meanwhile, consumer spending, which accounts for more than two-thirds of U.S. economic activity, recorded its biggest increase in more than eight years in September.
