How much space should small caps operate after Trump’s win? Through Investing.com
Investing.com — A Trump victory could prompt hedge fund investors to go short, which recently tracked Trump’s betting odds in October, RBC Capital Markets said in a report.
This trade has a historical precedent, as the small suspension increased in 2016, 2017, and 2018 amid the optimism following Trump’s victory, the corporate tax cuts favoring small companies, and the US-China trade war.
Futures rose sharply on Tuesday night as election results came in, with the index gaining 5.8% on Wednesday.
Strategists at RBC noted one of the key questions for investors on Wednesday was how much small rooms would need to increase.
They suggested that the position and sentiment may have already been extended, near the highs seen in 2016, 2017, and 2018, according to the latest CFTC data.
Strategists recommended a watch for the Russell 2000’s median price-to-earnings (P/E) ratio, which was 16.7x as of Tuesday, compared with previous peaks of 18.9x in 2016, 19.7x in 2017, and -17.6x in 2018. This suggests some limited potential for additional benefits.
“There’s not a ton of ground left, but probably some even after Wednesday’s big move,” strategists wrote.
In retrospect, RBC saw small caps perform best in the long run following Trump’s 2016 victory and Biden’s 2020 victory, even though both rallies were short.
The 2016 performance peaked a month after the election, followed by two short rallies in 2017 and 2018. In contrast, the 2020 meeting lasted almost four months.
Interestingly, both periods of weak energy coincided with rising 10-year Treasury yields.
Trump is expected to return to the White House for another four-year term, along with his running mate, Senator JD (NASDAQ: ) Vance of Ohio.
NBC News projects that Republicans are likely to regain majority control of the US Senate in 2025, with at least 51 seats gained in the 100-member chamber in January, when the new Congress was sworn in.
