What factors favor small-cap stocks today?
There are probably five key factors that drive our thought process on small-cap. The first one, it's in the news the most, is all of these trade and tariff concerns, the escalation of the risk of a trade war between the United States and other countries. Small-caps are a good way to insulate yourself from that problem, because small-cap companies typically do 80% or more of their business here. Large-cap companies will do half or more of their business overseas. So, the small-cap companies don't have as much exposure to the problems associated with a trade war. Now, the U.S. economy right now is performing much better than other developed economies, for example in Japan or Europe. So the fact that, again, small-cap companies do most of their business here is going to benefit them relative to large-caps. Because the U.S. economy is doing so well, our central bank is tightening policy, raising interest rates, whereas most other central banks around the world are still being very accommodative. That's driving the dollar up. The dollar's been stronger versus other currencies over the last six months or so. That again benefits the small-cap companies, because the weaker dollar benefits large-caps because it makes their goods and services cheaper, and they benefit from positive currency translation gains. But when the dollar gets stronger, that money shifts to the other side and money starts to come into the small-caps. And then, finally, you've got the president's Tax Plan last year. One element of that was repatriation. There's 2.6 trillion dollars of cash sitting on overseas balance sheets that's going to come home. Well, companies are doing lots of things with that cash. They're increasing dividends, repurchasing shares, increasing wages. One of the things they're doing is merger and acquisition activity. The Wall Street Journal recently put out a story in which we are on pace for a record amount of M & A activity in 2018. And that is large-cap companies looking for high-growth, small-cap companies with better products, interesting niches, new customers. And so small-caps are benefiting disproportionately from that wave of M & A activity.
Views are as of July 11, 2018 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Small company stocks may be less liquid and subject to greater price volatility than large company stocks. Federated Advisory Services Company 18-75138 (7/18)