June, generally, spells trouble for stocks. Trading is going to especially tight this month, thanks to the mid-term election. And if these weren’t enough, Trump is bent on severing trade ties. America’s biggest allies and trade partners are gearing up to fight the latest tariffs on steel and aluminum by targeting American products worth billions of dollars. Amid all these, mounting political instability in Italy and Spain, and tensions with North Korea are rippling through markets.
Thus, the best way to go about this tricky June is investing in small caps. This niche segment is undeterred by trade war and other geopolitical concerns. They are expected to outdo their large-cap peers by a comfortable margin, defying the obvious deterrents.
June Typically Rough for Investors
When do we see a typical market swoon? It’s when major bourses, including the Dow Jones and the S&P 500, experience a substantial drop. And that’s exactly what happens in June. After all, it is among the worst phases for indices, per the Stock Trader’s Almanac.
The Dow Jones, on average, has shed 0.3% in June, per data that goes back to 1950. In the last 67 years, the blue-chip index finished in the red for 36 times in June. For the broader S&P 500, June is the third-worst month of the year.
The phrase “sell in May and go away” reverberates the same idea. Investors typically sell their stock holdings in May to avoid a seasonal decline in equity markets. They return to the equity market in November.
Trading Particularly Troubled in Midterm Years
An additional element of uncertainty could come from the run-up to the mid-term election. Analysts at Goldman Sachs Group Inc (NYSE:GS) have added that the stock market mostly see-saws during the pre-mid-term election period and rallies once the uncertainty fades.
The Dow has typically fallen, on average, 1.7% in June during mid-term years, while the S&P 500 has seen average decline of 1.9%, per the Almanac. With campaigns beginning to ramp up for the November vote this month, markets are exposed to political risks.
Trade War Fears Reignite
Investors, in fact, should prepare for increased turbulence as the United States decides to impose tariffs on steel and aluminum imports from the European Union (EU), Canada and Mexico. This in turn has sparked chances of retaliation by the trade partners and reignited concerns of a global trade war. A full-fledged trade war will have rippling effects on global economy growth, casting a pall over businesses.
With White House pulling the tariff trigger, Canadian Prime Minister Justin Trudeau said that Canada will impose a 25% tariff on U.S. steel imports and 10% on aluminum. Mexico also vowed to slap tariffs on U.S. goods, while the EU targets classic American industries like whiskey and motorcycles. The EU, in particular, is expected to levy tariffs on nearly $7.5 billion worth of U.S. goods.
Jean-Claude Juncker, president of the European Commission, said that “the United States now leaves us with no choice but to proceed with the imposition of additional duties on a number of imports from the United States.”
Geopolitical Risks Loom Large
Let us also not forget that the political crisis in Italy and Spain has created ripples across the global equity markets. While a euroskeptic party’s win could endanger Italy’s membership in the single currency, Spain’s major opposition party has called for a parliamentary vote in an effort to oust prime minister Mariano Rajoy.
Trump’s withdrawal from the Iran nuclear deal, by the way, hasn’t gone down well with leaders in Europe. Trump’s decision to call off a June meeting with Kim Jong Un also appears to have done little for the North Korea crisis. Trump citied “open hostility” from the North Korean regime as the primary reason for scrapping plans of a summit with Jong (read more: Political Drama Raises Stake for Wall Street: Top 5 Picks).
Bulls Are Betting on Small Caps: 5 Solid Picks
As the markets seem to be plagued by widespread uncertainty this month, smart money is expected to pour into stocks with high domestic exposure. Small caps remain unperturbed by international disputes due to limited exposure to foreign markets. Meanwhile, geopolitical tensions are, mostly, headwinds for large-cap companies as they eat into overseas profits.
Lest we forget, the current strength in the U.S. dollar is weighing on multinational stocks. But, small caps have little or no exposure to overseas market when it comes to revenue generation. So, they tend to gain with a stronger dollar.
The small-cap S&P 600 index is up 8.6% since the start of the year, compared with 2.6% gain of the large-cap S&P 500.
Thus, investing in small-cap stocks seems the right thing to do now. We have picked five small caps that should make meaningful additions to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Top Stocks to Pull Through the June Swoon: AAC Holdings Inc (AAC)
AAC Holdings Inc (NYSE:AAC) provides inpatient and outpatient substance use treatment services for individuals with drug and alcohol addiction, and co-occurring mental/behavioral health issues in the United States.
The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 6.8% in the last 60 days. The stock’s expected earnings growth rate for the current year is 31.7% versus the Medical – Outpatient and Home Healthcare industry’s estimated rally of 22.3%.
Top Stocks to Pull Through the June Swoon: Bryn Mawr Bank Corp. (BMTC)
Bryn Mawr Bank Corp. (NASDAQ:BMTC) operates as the bank holding company for The Bryn Mawr Trust Company that provides commercial and retail banking services to individual and business customers. It is headquartered in Bryn Mawr, Pennsylvania.
The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 1.9% in the last 60 days. The stock’s expected earnings growth rate for the current year is 29.3% versus the Banks – Northeast industry’s projected growth of 24.9%.
Top Stocks to Pull Through the June Swoon: Lindblad Expeditions Holdings Inc (LIND)
Lindblad Expeditions Holdings Inc (NASDAQ:LIND) provides expedition cruising and adventure travel services. It is headquartered in New York. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 76.9% in the last 60 days.
The stock’s expected earnings growth rate for the current year is 155.6% versus the Leisure and Recreation Services industry’s estimated rally of 18%.
Top Stocks to Pull Through the June Swoon: Orchid Island Capital Inc (ORC)
Orchid Island Capital Inc (NYSE:ORC), a specialty finance company, invests in residential mortgage-backed securities (RMBS) in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 2.8% in the last 60 days.
The stock’s expected earnings growth rate for the current year is 77.4% versus the Financial – Mortgage & Related Services industry’s estimated rally of 13.3%.
Top Stocks to Pull Through the June Swoon: Salem Media Group Inc (SALM)
Salem Media Group Inc (NASDAQ:SALM) operates as a multimedia company in the United States. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 68.4% in the last 60 days.
The stock’s expected earnings growth rate for the current year is 23.1% versus the Broadcast Radio and Television industry’s estimated rally of 19.8%.
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