Regardless of your political preferences, if you’re a small-cap investor, then you should be happy about the market’s recent showing. After more than two years of basically going nowhere, the Russell 2000 small-cap index rallied to new highs in the week and a half of post-election trading. 

This is especially impressive considering the overall market’s performance. The S&P 500 index, a benchmark for the broad market, has also done well in these few post-election trading days, but its 2% rally cannot compare with the stellar, record-book-testing 10% return for the Russell 2000. 

Why so much exuberance, and can it possibly continue? 

Let’s first look at the macro-economic reasons. 

Small Cap Rally Points To Future Growth
Most notably, such an amazing showing of relative strength clearly points toward stronger economic growth going forward — at least, this is what the market has been expecting, based on the amount of money being poured into small-cap stocks. 

#-ad_banner-#Smaller companies tend to do well when the economy does well, and there isn’t much doubt among investors that the U.S. economy has been doing quite well. 

The Federal Reserve has been telling us as much for most of the year, having emphasized lately that the economy has become strong enough to withstand higher interest rates. Hence the small-cap money inflow and the ensuing rally. 

Small caps also are more domestically oriented that the rest of the market. 

Trade policies of the new administration remain a question mark, and smaller caps — which tend to be much more focused on domestic markets — are now the major beneficiaries of these doubts. The new administration is expected to implement protectionist trade policies, repeal or replace some of Obamacare, be more relaxed when it comes to financial regulations, and also implement significant fiscal infrastructure stimulus — all of which would benefit small-cap stocks more than those with larger market caps. 

The U.S. dollar, in the meantime, has continued to rally, advancing and then exceeding the previous highs of 2016 against a basket of major currencies (see the chart below). The prospects for higher interest rates, higher growth and higher inflation boosted the rally in the dollar. And while a stronger dollar is an impediment to the overall earnings growth and competitiveness of large U.S. multinationals, smaller caps actually benefit. 

The U.S. Dollar Has Continued To Rally

The Small-Cap Rally Has Legs
Here’s one more factor that has likely contributed to the rally: Coming into the month of November, small-cap stocks as a group had underperformed the market. As investors rotated to sectors they thought would be best positioned for the new economic and market conditions, they bid up small caps against other market areas. 

Now, the small-cap frenzy may have gotten a little overheated, and a pullback is a distinct possibility. However, based on what we know now, the recent strength has legs. 

Moreover, while the overall strength of small caps marks the reflection of growth expectations, this thesis is even more valid for certain individual stocks. 

In fact, many of the stocks I hold in my aggressive-growth newsletter, Game-Changing Stocks, are small-caps. And most of our small-cap holdings did well during the post-election period, posting rallies of 7.4%, 12.2%… even 22.8% in one case. Of course, the small-cap stocks I hold in Game-Changing Stocks are just a small sample size, but the larger rally in small-caps seems to confirm that this is the place to be in the market right now.

This is one reason why my subscribers and I recently added a growing biotech company to the Game-Changing Stocks portfolio. Plus, not only does it have a unique, life-changing business — it will also be largely immune to likely potential changes in healthcare policy by the new administration and Congress. If you’d like to get the name and ticker symbol of this stock, simply go here to learn more about my newsletter.