Kensho Stats

Big-cap Dow grabs headlines at 19,000, but small caps may shine brighter under Trump

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The Dow Jones industrial average closed above 19,000 Tuesday as investors bid up large-cap banks and multinationals in the last two weeks on hopes President-elect Donald Trump will usher in a new era of deregulation, tax cuts and economic growth.

But he may also bring with him higher interest rates and a surging U.S. dollar.

And that's not always great for the Dow, history shows. In fact, it may favor shares of smaller companies.

Using hedge fund analytics tool Kensho, we found what happened to the Dow, the S&P 500 and the small-cap benchmark Russell 2000 index during six-month periods when both the U.S. Dollar index and the 10-year Treasury yield increased significantly.

Specifically, our search looked for six-month periods in the last 30 years when the dollar index increased 5 percent and the price of the 10-year Treasury (which moves inversely to its yield) fell 5 percent. This occurred seven times since 1986.

Here's what happened to the major indexes...

Small caps almost triple the return of the large-cap benchmark Dow, according to Kensho. This is most likely the case because the strong dollar hurts exporters and rising rates increase large caps' funding costs. Small caps are more likely to be domestically oriented and less likely to finance large amounts with debt.

Not to mention, small caps may benefit the most if Trump gets his way on taxes and infrastructure.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.