One portion of the Trump trade is alive and well, and investors are betting it has further to run
Their confidence is manifesting itself in a lack of hedging. Investors are paying the least since the start of the eight-year bull market to protect against losses in the Russell 2000 index of small-cap stocks.
With the gauge just two days removed from a record high, this apparent lack of concern is a highly bullish signal. It's already surged 19% since the presidential election, 7 percentage points more than the S&P 500, which hasn't done too shabby in its own right.
Investors don't seem keen to stop there. They piled more than $4 billion into an exchange-traded fund tracking the Russell 2000 over the week ended April 26, the biggest five-day inflow since right after election.
The logic behind the surging popularity of small-caps is that the group makes most its their money domestically, thereby positioning it to benefit more from a lower corporate tax rate.
They stand in contrast to larger multi-national corporations, which are able to defer taxes on overseas profits, and theoretically wouldn't see as much of an immediate windfall from a tax cut.
Small-caps aren't taking their fortune for granted. As Bloomberg's Drew Singer points out, the companies are taking advantage of investor goodwill to tap capital markets. He notes that of the $47 billion raised by public companies this year, well over half of that has been by companies with less than $5 billion of market value.
Not everyone shares their optimism.
To Bank of America, the quick climb higher for small-caps marks the "last bout of optimism" for trades tied to expectations of Trump policy. The group is now trading at "tech bubble-like valuations," a group of the firm's analysts led by Dan Suzuki wrote in an April 27 client note.
Still, traders are paying the lowest premium since May 2009 to protect against a 10% increase in the Russell 2000 over the next three months, relative to wagers on a 10% increase, Bloomberg data show. In other words, investors haven't been this unhedged on small-caps since two months after the bull market started.