Investors are scooping up U.S. small cap stocks as the specter of steel and aluminum tariffs escalating into a global trade war makes them more edgy about larger companies exposed to international markets.
The resignation of Gary Cohn, a top economic adviser to President Donald Trump who was seen a key voice pushing against protectionism measures, set off the latest bout of market volatility on Wednesday tied to fears of the tariffs.
Since Feb. 28, the day before Trump said he would impose import tariffs of 25 percent on steel and 10 percent on aluminum, the small-cap Russell 2000 has climbed 4.1 percent while the S&P 500, the benchmark for large-cap stocks, has risen 0.5 percent.
On Wednesday, while the S&P 500 edged lower in a rocky session following Cohn's departure, the Russell gained 0.8 percent.
Small cap stocks are "domestic by nature; they're not selling internationally," said Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina. "That they're insulated makes them potentially one group that will benefit on a relative basis."
The small-cap trade echoed the months after Trump's November 2016 election, when the Russell soundly beat the S&P 500 as investors bet on policies, such as corporate tax cuts, that would particularly benefit domestically-focused companies.
In 2017 overall, however, the Russell's 13 percent gain lagged the 19.4 percent climb for the S&P 500, and the small-cap barometer had underperformed this year, until Trump's tariff announcement last week.
"Somebody that's buying a U.S. small cap company that makes all its products in the U.S. is probably comfortable," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "You don't have a global situation there."
The S&P 500 derives about half its profits from outside the United States, according to Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
Even so, he said, "there's merits in why you'd want to be diversified across small and large cap."