By Matt McCallApr 13, 2018
In my NexGen newsletters, our strategy is to look for stocks that have big upside potential in powerful mega-trends that are changing our world. That often leads to smaller, lesser known companies, so by default the majority of the stocks we follow are either small- or mid-cap companies. Many people believe these stocks inherently have more risk, but not only is that a very broad generalization, it is also completely untrue. At one point in time, all large companies were small caps that flourished and grew into today’s leaders. Our goal is to find tomorrow’s leaders now in their early stages and own the stock before Wall Street has caught on to the big picture. We can make a lot of money that way.
Even with the broad volatility so far this year, smaller stocks have easily been outperforming their larger counterparts. As of the beginning of this month, the iShares S&P Small-Cap 600 Growth ETF (IJT) is up 3.5% in 2018 versus the SPDR S&P 500 ETF’s (SPY) 0.5% loss. Even more impressive is the fact that IJT is down just 1.9% since the S&P 500 hit a high on January 26 while SPY is down 7.3%.
There are many reasons why small caps have been performing well recently, and two in particular stand out. The first has to do with tax cuts. It’s no secret that the tax reform bill has been a boost to most United States-based businesses, but the biggest winners have actually been the smaller companies that generate the majority of their sales here at home. The multinationals are also prospering, but because of their reliance on overseas sales those benefits vary greatly.
The strong economy is also helping. The unemployment rate near record lows is a sign that most folks who want to be employed are. On top of that, wages are starting to increase at a good pace, which ties back to a stronger and more confident American consumer. There is no recession on the horizon, and with anticipated GDP growth of 2%-3%, the economy continues to be in a Goldilocks scenario – not too hot and hot too cold – that is great for stocks.
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