Small Cap Investors Could Be In Store For A Volatile End To 2017

For most of 2017, volatility has remained tame, but heading into the final weeks of trading, small-cap stocks may be in for a volatile ride.

The Expert

Matt Maley, an equity strategist with Miller Tabak.

The Strategy

As the White House appears ready to debate the tax bill, the small-cap iShares Russell 2000 Index (ETF) IWM could experience volatility, Maley said. 

The Thesis

The U.S. senate is expected to vote on President Donald Trump's tax reform this week, and small-cap stocks are more exposed to the domestic economy and could see outsized reactions to the "ebbs and flows" of the legislation, Maley said during a recent CNBC "Trading Nation" segment. But small-cap companies as a whole are also paying a slightly higher tax rate versus large-cap companies, which implies that smaller companies would benefit more from the passage of the tax reform plan.

The Russell 2000 index has traded in tandem with the likelihood of tax reform passing through both houses of Congress, so if the index falls this week, it may signal there are difficulties in passing the bill, Malek said.

The index sold off in October when many experts suggested the tax reform bill is essentially "dead on arrival," and if progress is not seen this week, the index could fall anywhere from 5 to 7 percent, according to CNBC. 

Price Action

The Russell 2000 index was trading higher by around 0.4 percent Tuesday morning and is higher by 12 percent since the start of 2017.

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