The ETF Portfolio Strategist: Saturday, Jan. 16

Small-cap stocks are pricing in a rosy 2021. There are still plenty of risks lurking, including uncertainty over what the incoming Biden administration will be able to accomplish.

On Thursday, The President-elect outlined an ambitious $1.9 trillion pandemic relief program that, if enacted, would go a long way in juicing the economy. Whether his policy prescription survives the tortured politics of the Beltway in the weeks ahead is an open question. For now, shares in the small-cap realm appear to be anticipating a rosy year ahead (or at least one that compares favorably vs. the "annus horribilis" that just ended).

The iShares Core S&P Small-Cap ETF (IJR) rose 1.9% this week (through Jan. 15). This slice of the US stock market is once again the top-performer for our list of fund proxies for the major asset classes (see the G.B16 table below).

The bull run is par for the course in recent history for IJR, which has rallied in ten of the last 11 weeks, pausing only briefly with a mild setback in 2020’s closing week. Otherwise, it’s been up and away for U.S. shares in the lesser-capitalization bucket.

The prevailing narrative behind the small-cap rally is that shares in this corner are thought to be more sensitive vs. larger firms to positive effects of the economic recovery that the Biden administration is planning to engineer through policy decisions in the months and years ahead.

It’s anyone’s guess how the dynamics of Washington will play out this year in the wake of the Trump’s administration’s chaotic denouement. Forecasts aside, IJR’s upside momentum remains red hot through the recent close, which implies that it’ll take more than a few setbacks in Washington to derail the party.  

Most corners of the global markets, by contrast, had their sails trimmed this week, as the table above shows. The deepest cut was in Latin America stocks via iShares Latin America 40 (ILF), which slumped 3.2% for the week. The fund had been on a tear since November, thanks in part to a falling dollar.

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Disclosure: None.

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