In trade war, small stocks may fare best

If a big-time trade war breaks out between the U.S. and its trading partners, small-company stocks will be far from the front lines.

In general, a trade war isn’t good for stocks because it likely will hurt the global economy and profits of big companies that do a lot of business globally. The winner in the event of a trade war, therefore, will likely be small American companies that get most of their sales from the United States, says Alec Young, managing director of global markets research at investment firm FTSE Russell.

Fears of a trade war rose Thursday after President Trump said the U.S. plans to target China with an estimated $60 billion in tariffs on goods it imports to the U.S. That move follows Trump’s earlier decision to slap tariffs on steel and aluminum entering the U.S.

Small-cap stocks in the Russell 2000 stock index have a few things working in their favor if Wall Street’s protectionist worries come to fruition. Their U.S.-focused profit stream tops the list.

“Small-cap stocks have been able to weather escalating global trade war fears better than their large-cap counterparts primarily because they have less of their sales coming from international markets than big multinationals do, so they have less to lose from trade conflicts,” Young explains.

Another plus: The Russell 2000 also has “less exposure” to technology stocks — an industry group with a lot of global exposure — than large-cap indexes, Young adds.

The small-company index has a 17% tech weighting, vs. about 25% for indexes that track large stocks.