For stocks around the world, the struggle is real.
On the heels of the pivotal Brexit vote last week, over $3 trillion dollars of wealth evaporated from the markets.
This week, the S&P 500 Index fell below its 200-day moving average and touched 2,000 for the first time since March.
Overseas, the UK blue-chip index – FTSE 100 Index – fell 3%, and the European STOXX 600 Index plunged by 11%.
The downward moves have been brutal, and chart analyses of the major indexes suggest that the bleeding isn’t over yet.
But if European stocks continue their plunge into the abyss, this segment of the stock market could rise through the end of the year…
Home is Where the Profit Is
Investors love large-cap stocks for their dividends, relatively low volatility, and ample liquidity.
But these stocks have one glaring weakness that has been brutally exposed this month: international exposure.
According to FactSet, S&P 500 firms that generate 50% or more of their sales outside the U.S. will report at least a 9% decline in earnings in the second quarter.
And those figures were reported before the pound took an 11% header last week.
As you may know, when the dollar strengthens, profits earned overseas by US companies get pinched.
For one, sales generated in a foreign currency convert into fewer dollars.
And foreign demand often weakens for goods priced in dollars, as they become more expensive for consumers. On the other hand, domestically-focused stocks are looking a whole lot sweeter…
Go Small and Stand Tall
The earnings of large-cap companies that book 50% or more of their revenue in the US are expected to drop just 2.8%.
And while large-caps have taken a big hit, small-cap issues have held up better than their larger counterparts.
Since the start of the year, the S&P SmallCap 600 Index has gained 1.2%, versus a 0.4% decline in the S&P 500 Index.
And in the month period ahead of the referendum vote, the small-cap index surged 5% as the “smart money” positioned for a possible “Leave” vote. Large-caps gained just 2% over the same period.
As you can imagine, the companies with the greatest international exposure will suffer the most in this environment.
But small-caps generate the majority of their profits here in the US, and are largely insulated from these currency effects.
This makes them the perfect target for investors looking to reduce their foreign exposure.
And as we approach the halfway point of the year, now could be the best time to scoop up small-cap shares…
Over the next few weeks, I’ll cover some of the tastiest small-cap opportunities, best shielded from the chaos across the pond.
Stay tuned.