When President Trump launched the U.S. into a trade war in 2018, many fund managers argued that small-cap stocks were poised to outperform because their business would be immune to tariffs and uncertainty.
What's happening: They did well over the course of that year but after Tuesday's 3.5% decline, the Russell 2000 index, which tracks many of the nation's small public companies, has fallen to near its closing level from February 2018.
The big picture: Whereas small companies previously drove innovation by disrupting bigger companies with new technologies and ideas, today many large companies can simply buy competitors to generate growth in-house.
- Decreasing regulations play a role but so does the changing nature of big businesses, particularly in the United States and China.
What they're saying: “If big companies like Alibaba, Amazon, Facebook, Tencent are just going to keep on winning, then the concept of buying small caps changes,” Erik Weisman, chief economist at MFS Investment Management, told me.
- “In a world where winners take all and just keep on winning, we don’t see small firms that show up on the public playing field.”