While the Dow (^DJI, DIA) was posting its ninth consecutive record close, with the tech-heavy Nasdaq (^IXIC, QQQ) trading above 6,000 and with the S&P 500 (^GSPC, SPY) holding above 2,400—you might think the whole market is on fire. You might also be surprised to see your portfolio or 401(k) flat to possibly down a little. So what’s going on?
The Russell 2000 (^RUT, IWM), the major index tracking the small cap stocks, shows a gain of 14.93% over the last year—not too bad. But dig deeper, and you will see another story. Since January 1, while the Dow is trading at new record highs almost weekly and the Nasdaq is up 18.59%, the Russell 2000 is up only 4.20%. And after yesterday’s ninth straight record close for the Dow, the Russell is down -0.77% in the last five days.
The “Trump Train”—as they were calling it—and the promise of both tax cuts and a reduction in regulations had the small caps off to a roaring start right after the election. As fall turned into winter, then to spring, those promises never materialized, and the small caps started to falter. Although the weak dollar is great for the big multinationals selling abroad, the domestic-centric companies in the Russell are finding US consumers more reluctant to spend. Should we ever get the much-needed tax reform “as promised,” that would be a huge boost for the small caps.
On the campaign trail, President Trump had called for a tax rate of 25%. That is probably unrealistic, but a rate in the low-30s would be both a win for the consumer and Wall Street. Anything from the low-40s on up would be viewed as a loss by most on Wall Street. Reducing regulations would add trillions to the bottom lines of small American businesses. By some accounts, burdensome regulations cost small cap companies over $2 trillion per year. The time spent filling out the forms related to these regulations costs small business millions.
Should both taxes and regulations shrink, we could quite possibly see Dow 30,000 in the not-so-distant future.