What should small-cap investors take away from the election results?

The initial vote the global markets cast in reaction to Donald Trump’s surprise victory was negative and extreme, yet is already growing more subdued.

Markets have been rallying steadily since the result became clear, the European markets are stable, and, in a positive sign for small-cap investors, the yield curve is steepening. So far, then, the response has been very similar to Brexit with a dramatic move down later muted by a recovery.

Small-Cap Industrials
Image source: Wikimedia Commons
Small-Cap

Markets typically react to surprises with the kind of extreme swings we saw overnight. Uncertainty drives investors to the sidelines as they pause to try to make sense of unexpected events before adjusting and moving forward.

Of course, the world will be watching closely how the Trump Administration takes shape. As has historically been the case, we expect to see the usual cooling of campaign rhetoric give way to more pragmatic and sensible policies in the months to come.

In the meantime, we will be both diligent and opportunistic as the effects of the election begin to sort themselves out. We are likely to be selective buyers today in cases where panic selling of strong companies gives us opportunities to buy what we think are good companies at great prices.

Going forward, we’ll continue to devote the bulk of our time to looking at companies, talking to management teams, and trying to create the best outcomes for our shareholders. This to us is the essence of active management, which we think is important given the current uncertainty.

Equally important, we still have a sound economy, an accommodative Fed, and no immediate threat of a recession here in the U.S.

It’s also worth recalling the historical context—since 1945 the five-year return on small caps has been positive 95% of the time.

Stay tuned…

Article by Francis Gannon, The Royce Funds