Looking for an ETF to watch out for this week? Keep an eye on the iShares Russell 2000 ETF (IWM).
With the earnings season largely wrapped up at this point, it’s time to look for other drivers that could move the market this week. That will likely come Tuesday in the form of Donald Trump’s first State of the Union address to a joint session of Congress and the nation (or is it a State of the Union speech?).
The big thing I’ll be watching for in the speech is any update regarding tax reform. The S&P 500 has rallied more than 10% since the election on Trump’s pro-business agenda and promise of “massive” tax cuts for companies. So far, we’ve gotten very few specifics on what that tax reform will look like outside of a few Trump-ian superlatives like “great” and “fantastic”. The market has moved up mainly on promise to this point, but if the administration doesn’t start providing details relatively soon, the market could be begin wondering if real reform is coming any time in the near future.
The Russell 2000 has especially benefited from the Trump rally. A large corporate tax break would be expected to benefit smaller companies more than large ones since most of their revenue is generated domestically and the impact would be larger for small caps on a relative basis. New Treasury Secretary Steve Mnuchin talked this week about enacting some form of tax relief by August of this year. Watch to see if Trump confirms the plan in his speech. If he fails to deliver any key details about his economic agenda for the upcoming year, it could be the impetus for a short-term reversal of the current up trend.
Small caps diverged from large caps during the past week in what could be considered a bit of consolidation heading into this week. Small caps have been and continue to be expensive relative to the broader market so a short-term pullback could be healthy in order to continue moving higher. Tuesday’s speech could help the cause, but it has the potential to lead to a something along the lines of a 5% contraction as well.
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