October 12, 2017. By Mark Barry:

Small cap stocks have been on a roll lately, with the Russell 2000 Index hitting several new all-time highs. For the month of September, the Russell 2000 Index (IWM) was up 6.2%, compared to a 2.1% gain for the S&P 500 Index (IVV).

Although large cap outperformance has been the trend for the majority of the year thus far, this reversal has seen small cap stocks narrow the year-to-date performance gap. Through the end of the third quarter, the S&P 500 Index (IVV) and the Russell 2000 Index (IWM) are up just over 14% and 11%, respectively.

September Small Cap Performance Image

Source: Morningstar

Similar to the rally small caps exhibited post-election, recent performance has been at least in part driven by the prospect of corporate tax reform. Relative to large multinationals, smaller companies tend to have effective tax rates closer to the stated rate and derive a higher proportion of their revenues from the US market, thus are likely to benefit more from any reduction in the US corporate tax rate.

However, it is worth highlighting that this rally is based on the prospect of tax reform, and Washington will need to eventually produce some results. While small cap stocks would benefit from continued economic growth in the US, failure to enact meaningful corporate tax reform would likely weigh on the small cap rally in progress.

Please note that this information should not be relied upon by the reader as research or investment advice regarding any security in particular.  Past performance does not guarantee future results. Investing involves risk, including possible loss of principal.