Is Small Cap Strength Sustainable?

Small caps have surged since Election Day. As shown in Figure 1, the small cap Russell 2000 Index has outperformed the large cap S&P 500 by 8.1% since November 8, 2016. The relative strength has been driven by several election-related factors, including prospects for corporate tax reform, deregulation, and President-elect Donald Trump’s efforts to encourage U.S. manufacturing and discourage offshoring. Here we share our thoughts on the potential policy impact on small caps and discuss whether recent small cap strength is sustainable.

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