On Tuesday the Fed Powell will discuss US monetary policy and on Weds will announce whether he is keeping interest rates on hold or dropping them. In July Fed Powell lowered interest rates for the first time in a decade. Wall Street is expecting the same on Weds, pricing in an 86% chance of a quarter-basis point cut.
If the US equity markets are going to continue their climb higher, the Russell 2000 must fall inline. The Russell 2000 index represents the largest 2000 small cap public companies in the US. But in recent months the Russell 2000 have been stubborn to rise with the DOW, NASDAQ and S&P 500 as indicated by the green line.
Usually towards the end of the business cycle, rising interest rates hurt smaller companies the most because they have a higher debt to earnings ratio and lower free cash flow relative to much larger companies. Also, smaller companies are more volatile and tend to react and respond to changes in economic conditions and changes in investor sentiment first. However, if rates are going to continue to get cut, that should help the Russell 2000 to finally join the party. And based on the Russell 2000 outpacing its friends last week, I think it things a rate cut is already “money in the bag.”
The iShares Russell 2000 ETF, which tracks the Russell 2000 Index of stocks with smaller market capitalizations, saw its largest weekly inflows in nearly a year during the week that ended September 6. Those inflows totaled $1.5 billion and followed a $340 million inflow during the final days of August. Since bottoming out on August 27, the iShares ETF has rallied nearly 9% compared to the S&P 500’s gain of 5% over the same period.
There is the possibility that the resurgence could be longer lasting if the Federal Reserve’s interest rate cut at the end of July is more than just a one-off and marks the beginning of a rate-cutting cycle.
Judging by history, further rate cuts would be supportive of small-cap equities. During the first year following the start of a Fed rate-cut cycle, small caps have risen on average 28% compared with just 15% for large caps, according to investment banking firm Jeffries, per the FT.
Thus the chart suggests the two levels to monitor above price are the daily supply at $1630 and $1665.
This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.