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In a Trade War, Being Small is Better than Being Big

stock-exchange-1426330_1280 (Demo)

With rhetoric moving to action in June, concerns about the impact of a global trade war weighed on stock markets.  The US has announced tariffs on Chinese and European goods and China and Europe has announced retaliatory tariffs.  This has been a negative for the total world stock market which fell 0.56% in June as measured by the FTSE All World Index.

While the world market is down certain areas of the market have held up better than others.  Large cap companies are up for the year, but small cap stocks have performed even better.  The S&P 500 index of large companies gained 0.62% in June and 2.65% for the year.  Meanwhile, the S&P SmallCap 600 Index, a measure of smaller companies with market capitalizations of $2 billion or less, gained 1.08% in June and 9.17% for the year to date.  This trend applies internationally as well with international small cap stocks outpacing large cap stocks by 1.04 percentage points for the year to date.

Smaller companies tend to be more domestically focused.  Thus, tariffs have a more limited impact on their operations.  Large multinationals do business in many countries and have suppliers and customers all over the world and as a result face a much greater impact.  In addition, with the Fed raising the Fed Funds rate and growth currently higher in the US there has also been a resurgence of the dollar.  This makes US goods more expensive to consumers outside the US, which negatively impacts multinational companies.  S&P 500 index firms generate 38% of their income from overseas while small cap firms derive just 20% according to FactSet.

It is RWM’s investment strategy to emphasize small cap stocks over large cap stocks and as a result the recent strong performance of small cap stocks has helped the performance of the equity allocation.  While the current trade war is likely to increase volatility in the short-term, we will continue to tilt the equity allocation to smaller companies.  We believe remaining disciplined to this strategic tilt will help you meet your goals over the long term.

Index Performance   June QTD YTD Trl 1 Yr
US Stock (Russell 3000) 0.65%  3.89% 3.22% 14.78%
Foreign Stock (FTSE AW ex US) -1.90% -2.54% -3.65%   7.58%
Total US Bond Mkt. (BarCap Aggregate) -0.12% -0.16% -1.62% -0.40%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.01%   0.12% -0.27% -0.38%
Municipal Bonds (BarCap 1-10yr Muni)  0.28%   0.80%   0.23%   0.50%
Cash (ICE ML 3Month T-Bill)   0.17%   0.45%   0.81%    1.36%