WisdomTree Webcast: “The Trump Playbook”

December 14, 2016 While the November 8th election results shocked the country, investors are winning big by thinking small after experiencing significant growth in small cap companies. Tuesday’s RIA Channel webcast “The Trump Playbook” presented by WisdomTree, with post-election commentary from WisdomTree’s panel including Luciano Siracusano, Chief Investment Strategist, Jeremy Schwartz, Director of Research, and Kevin Flanagan, Senior Fixed Income Strategist. In order to best position portfolios, Siracusano, Schwartz, and Flanagan believe small cap companies have the potential to produce high returns for investors. Schwartz, explains that, “the market is headed into a very unique period where you are likely to get an additional earnings growth dimension from the potential cut in tax rates.” Schwartz also goes on to explain that this current market environment in combination with a strengthening U.S. dollar could create a potential head wind for the S&P 500. A REPLAY of this webcast is now available. Small cap companies are less reliant on foreign markets, thus a strengthening dollar has less effect when compared to larger cap companies that may find their American products becoming more expensive for foreign buyers. The Russell 2000, an index that tracks 2,000 small-capitalization companies, has risen 11% since the election and has recently outpaced the S&P 500. Based on a hypothetical scenario constructed by WisdomTree in reflection of the current market, if the corporate income tax rate is decreased to 25%, investors could expect to see as much as a 12% earnings increase in small cap companies. If corporate income taxes are cut to 15% as Trump has proposed, investors could expect to see even higher earnings of up to 23% in small caps. Flanagan explains that he was surprised earnings would not be even higher for small cap companies following such a significant decrease in corporate income tax rate. He also goes onto to say, “the rally that we have seen hasn’t even kept pace with the potential tax benefit we would get if we do go down to 15% in corporate taxes.” Performance is expected to continue as WisdomTree’s Sector Weighting Differentials anticipate interest rates continuing to rise and an improving U.S. economy. By shifting to lower price to earnings segments of the market, investors have the potential to benefit from high revenues. As illustrated in Chart A, WisdomTree MidCap Earnings Fund ETF (NYSEARCA: EZM) and WisdomTree SmallCap Earnings Fund ETF (NYSEARCA:EES) are currently overweight in cyclical sectors such as financial, industrial, and the consumer discretionary space. Both mid and small cap funds are now avoiding industry sensitive investments such as real estate, which is shown to be underweight when compared to the market.

Chart B illustrates how the mid and small cap sectors have performed during this period. Both sectors benefit from lower taxes, faster GDP growth and a strengthening dollar creating greater earnings potential under Trump’s policy expectations for corporate tax cuts. In looking again at EES and EZM, both funds have outperformed their comparable market-cap benchmarks.

As expected, The Federal Reserve raised interest rates a quarter percentage point today in their first meeting since the presidential election. This is only the second time rates have increased since June 2006 suggesting that inflation expectations have increased considerably and indicating that the labor market is tightening. Projections now show that central bankers anticipate three quarter point rate hikes in 2017.