Trump Advisor Navarro Predicts Continued Rally for Small-Cap Stocks

As the dust settles following the recent elections, the stock markets have been buoyed by the optimism surrounding the incoming administration of President-elect Donald Trump. However, small-cap investors may have even more reason to celebrate. Peter Navarro, Trump’s appointed senior counselor for trade and manufacturing, expressed his strong belief that small-cap stocks are positioned to outperform their larger counterparts significantly in the coming years.

The Small-Cap Advantage

In a recent interview with CNBC, Navarro stated, “Small business is going to outperform everybody in this country because of the kind of [policy] innovations that are going to be done.” This statement reflects a broader consensus among analysts that small-cap stocks—defined as public equities with smaller market capitalizations—are likely to thrive under Trump’s proposed policies.

The performance of small-cap stocks can be tracked in the U.S. through the Russell 2000 index. As of late, the Russell 2000 has recorded a remarkable 16.5% gain year-to-date. This growth trail is impressive, though it lags behind the 27.3% rise of the S&P 500. However, over the past six months, the Russell 2000 has outperformed the S&P 500, achieving a gain of 16% versus the S&P’s 10.3%.

Factors Favoring Small-Cap Stocks

Navarro outlined that the primary drivers of this expected small-cap rally are Trump’s plans for tax cuts, reducing regulatory burdens, and prioritizing energy production. He argues that these changes will not only uplift the broader economy but will disproportionately benefit small-cap companies.

“I think small caps are going to outperform because they got the biggest bang for the buck out of reduced regulatory loads and tax loads,” Navarro asserted. This perspective points to the potential for small businesses, often nimble and adaptable, to leverage these changes for rapid growth.

Valuations and Investment Sentiment

Jill Carey Hall, an equities analyst at Bank of America, noted that even following the surge in small-cap prices since the election, they remain “still historically cheap” compared to the large companies that make up the S&P 500 index. This valuation disparity may catch the attention of investors looking for promising opportunities in the stock market.

Policy Challenges Ahead

While the outlook for small-cap stocks appears favorable, the incoming administration will face significant challenges in implementing the necessary changes to small-business tax policy. One of the critical aspects awaiting attention is the impending expiration of a major tax break for small businesses, including sole proprietorships, partnerships, and S corporations, due at the end of next year. This tax break, which predominantly benefits wealthier Americans, poses a dilemma; making it permanent could cost nearly $800 billion over a decade, as estimated by the Committee for a Responsible Budget.

Policy analyst James Lucier from Capital Alpha Partners forecasted in a recent client note that this tax break is likely to be made permanent. He described it as “seemingly non-negotiable” for House Speaker Mike Johnson, a Republican from Louisiana. This indicates that broader political dynamics may play a significant role in shaping the future landscape for small businesses and their financial viability.

Conclusion: Optimism for Small-Cap Investors

As the markets adjust to a new political reality marked by introspective policy shifts, small-cap stock investors may find themselves at the forefront of potential growth opportunities. With anticipated reductions in regulatory and tax burdens, coupled with robust investor sentiment, small businesses may indeed strike a chord resonant enough to attract capital and spur long-term economic growth.

For investors considering their options in today’s swirling market, the advice from Navarro and analysts alike underscores the potential for small-cap stocks to reclaim their standing in the investment hierarchy, offering a bright outlook for those willing to explore this niche of the market.