A week before the end of November the Russell 2000 index climbed to a record high when he recorded the longest sequence of daily rises in the last 20 years.
After rising for 13 consecutive days from early November (just before the US elections), he has risen over 13% this month and completed his longest sequence of gains since February 1996.
By comparison, the S&P500 rose during the same period by 4.5%.
Oops – not just from the last month
Since the beginning of 2016, the Russell 2000 index rose by nearly 20% due to continued improvement in the US economy.
In the last quarter, the economy grew by 2.8%, while its average growth rate over the last decade was about 1.5%.
The improvement in the US economy translates immediately to companies in this index, as their main activity is in the United States as opposed to the largest global companies characterize the Large Cap indices like the S&P500 or the Nasdaq 100.
The Russell 2000 index consists of 2000 companies with the smallest market capitalization in the Russell 3000 index, which includes the 3,000 shares with a value sack highest among US companies traded on the NASDAQ, AMEX, and NYSE and accounts for about 10% of the total market value.
This definition does not need a minimum market capitalization for companies in the index or maximum, as the main criterion in selecting stocks is their market value.
The largest company in the index is the chip-maker AMD (0.35% of the index), whose market value is $ 8 billion, while the smallest company in the index (0.0006%) is a small pharmaceutical company Tokai Pharmaceuticals market cap is $ 23 million.
The weighted average of the market capitalization of companies in the index is $ 1.3 billion.
6 key factors of the Russell 2000 rise
1. Leap of Russell 2000 since the election was mostly due to choosing Trump, and his commitment to work for a faster economic growth.
As part of his plans called Trump to increase fiscal measures in the form of investments of up to $ 1 trillion over the next decade upgrading infrastructure, bridges, roads, schools, hospitals, railways etc.
Such a boost to the local economy may contribute especially to companies whose operations are mainly concentrated in the local economy.
2. The jump of the dollar against almost all currencies in the world since the elections is another factor of incentives to small stocks.
Unlike large companies, strengthening of the US dollar reduces their revenues in foreign currency. smaller companies are generally not affected (60% of Apple’s revenues, for example, come from outside the United States, Google it is 55%).
Since the election, the dollar strengthened by 10% versus the Mexican peso, 7% against the Turkish lira, 5% against the yen, 4% against the euro, 2.8% against the Indian rupee and 1.6% versus the yuan.
3. If anything, smaller companies may actually gain from the strengthening of the dollar, which saves money on imported raw materials.
Not to, raw material processing sector in the Russell 2000 rose in early November 18% and for the year by nearly 50%.
This increase related, of course, the rise in prices of oil and raw materials.
4. The expected rise in US interest rates in December and probably again during 2017 expected to maintain a relatively strong dollar, as any other developed country interest rates are not expected to rise in the coming year.
The strength of the domestic currency may also have a positive effect on private consumption in the US – the main growth engine economy and most of the small and medium-sized companies.
5. Even small companies expected to earn (or at least not get hurt) Trump’s plans tax reform.
On the one hand, the expected reduction in corporate tax (originally spokesman for download from 35% to 15%, but now talk about reducing to 20%) as well as leading tax brackets may also have a positive effect on local companies and consumption.
On the other hand, plan to collect taxes from American companies with large operations outside the United States will work to the detriment of the indices measuring these companies and for the benefit of small stocks.
6. Small stocks also less affected by the opening of trade agreements concerns the United States and perhaps even changes in immigration policy, given the fact that most of their activity is in the local economy.
Difficult to predict the consequences of trade wars once they start, but may enhance economic activity in the US.
Easy sectoral distribution
Since the election, the sectors generating the best performance were finance and industry. A fact reflected in the Russell 2000 well, because these are some of the major sectors in the index.
The financial sector is almost 18% of the Russell 2000, it rose last month at 12% and has risen nearly 30% this year, mainly due to the rise in yields since the elections but also in anticipation of easing regulation on the sector.
The industrial sector, which accounts for about 14% of the index rose last month at 16% based on the expectations to increase infrastructure investment and security.
Even the technology sector, which is 17% of the index, behaving better than the technology companies in the S&P500 because of it less exposed to what is happening outside the US and fears of the changes implemented by Trump and that will affect the global companies.
Beyond the sectoral distribution that supports the Russell 2000 continue with its good performance, supported by the fact that price-earnings ratio of companies in the index after recent rises slightly lower than the average multiplier five years.
In the meantime, these explanations convincing many investors, who since the US elections pumped ETFs on the index about $6 billion, without taking into account purchases of other ETFs on other indicators of small and medium shares.