America Last: Darlings Of The Trump Trade Erase 2018 Gain, Fall Into Correction

Time was, small caps were the way to go if you believed in Trump’s “America first” mantra.

The assumption, generally speaking, was that by virtue of being U.S.-centric, small caps would be less exposed to the global trade war the administration was hell-bent on instigating.  Specifically, the argument boiled down to the idea that less international revenue exposure should equal outperformance.

Not everyone was buying that. Barclays’ Maneesh Deshpande, for instance, said the following back in July just days after the first round of 301 investigation-related tariffs took effect:

What really matters for estimating the impact of tariffs are the actual imports and exports and margins. Figure 13 shows the import/export values for small caps and large caps, as well as the impact on EBITDA in an all-out trade war scenario (10% tariff on all imports by U.S., 10% retaliatory tariffs by trade partners on exports). Note that these numbers are across all trading partners and not just China. We switch to EBITDA rather than net income since a significant fraction of Russell 2000 companies already have negative earnings.

BarclaysSmalls2

The bottom line is that the EBITDA impact is actually larger for small caps than large caps under an all-out trade war scenario.

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The Devil In The Details: These Market Darlings Are Actually More Exposed To A Trade War Than You Think

Fast forward to Tuesday and amid the broad-based risk-off sentiment that swept across global markets, the Russell 2000 erased the entirety of this year’s gains.

Russell

The index is in a correction, down nearly 13% from the halcyon days of … well … the halcyon days of two months ago. For the fifth time since the election, the MAGA euphoria inherent in small caps’ relative performance has completely evaporated.

RUTRatio

Part of this is likely due to balance sheet concerns as the cycle ages.

“Small caps have thrived on cheap access to capital, where the leverage ratio for nonFinancials (based on Net Debt/EBITDA) of 3.5x is near all-time highs, vs. large caps’ ratio of 1.9x which is in-line with history”, BofAML warned back in August, adding that “excluding Tech, small caps’ leverage ratio is a whopping 3.8x (12% below historical peak), vs. 2.6x for large caps (19% below historical peak).”

SmallCap

(BofAML)

As far as U.S. small caps versus global equities, note that the Russell ETF is on pace to log its worst monthly performance versus ACWI since May 2017.

IWMACWI


 

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5 thoughts on “America Last: Darlings Of The Trump Trade Erase 2018 Gain, Fall Into Correction

  1. Mr. Destructo strikes again.

    Destructo’s true brand is inflicting damage upon others and their property. Since the day he was able to negatively impact the lives of others, it’s that “evil force,” that has been his trademark calling.

    Whether damaging others was his intended purpose through acts of malice, envy, revenge, or a by-product of serving his own interests or needs, or simply a result of his existence, Trump’s presence on earth is simply one of a destructive force.

    It’s as if the writers of HULU’s original series, Castle Rock, had been thinking of Trump, when they conjured up the character of the “Kid,” played by Bill SkarsgÃ¥rd. I won’t ruin it for those who have not seen the show or its end, but suffice it to say that when the Kid explains his origins I found his explanation an acceptable one for Trump’s origins.

    Yesterday I challenged a Trump supporter I know to give me three instances where Trump’s endeavors to do good things for others on a large scale — before or after being elected — that when it was all said and done, there were no negative consequences or negativity as part of the project. I gave him the tax cut as an example of an act that did not qualify for obvious reasons. Still waiting.

      1. Just think how powerful Destructo’s powers are. In less than two years he managed to bankrupt whatever moral fiber establishment Republican party had left. He has grievously undermined the credibility of the three branches of government. He has now set out to destroy the independence of the Federal Reserve Board. He has impaired this Country’s standing globally to the extent that it is seen as a banana republic in many quarters, whose word, bond and treaties can no longer be trusted or relied on. He’s embarked upon a course of conduct that has, as an ultimate goal, the reduction of our country to a two-bit player by diminishing the importance of our soft power. One could go on and on with such a list, but to end mine: Destructo has emboldened in millions of others some of the worst thinking Americans have to offer and given truth to Clinton’s ill-spoke remark about a basket of deplorables. What we have now is much worse than a basket full or deplorables.

        Indeed, Putin has found the most useful man in the world to do his bidding, far beyond his wildest dreams. He is no useful idiot. He is evil incarnate.

        1. Who would ever have thought our strong respectful country could be so vulnerable? Credit does not go to trump alone because he is only the ignorant cowardly tool used by others, i.e., Putin and yes, the deplorables.

          I have met a few seriously unstable people over all my 72 years but they were never weaponized and linked as a “mob”. They took advantage of the freedoms of America and when you plug in the greed of FOX and their nationwide unchecked voice that further connects the evils, the cancer was rapidly growing and the uncivilized morally bankrupt people felt free to show their true selves as they watched trump unleash his evil insanity as they cheered for more!

          Now our battle to shut them all down or put their asses in prison will be more difficult and we will need some new stronger laws and better controls of crap like FOX and Alex Jones and Hannity types — no longer free to infect our society with their malicious and despicable behavior. No more games of entertainment vs. news and we only laugh at the idiocy of conspiracy theories and the kooks that brandish them. A majority of Americans should have more control over Congress — never again have a situation as we do now and the GOP’s allow a president to run amok.

          Step one, get rid of trump and clean out the GOP’s.

  2. We are seeing the beginning of the true impact of Delusional Don policies. Some more than others. Once the negative impact starts gathering steam it will be hard to reverse. Lower stock prices will lead to cost cutting/job cuts. Debt will crowd out investment. He will reverse into a cheerleader going into 2020 to no avail, it will be too late. The good news will be people will see Delusional Don has no clothes and will be out of office. The bad news is we will be haunted by the memory for a long time. He breaks it but someone will hopefully fix it in time. Sad!!!

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