Small caps were a popular trade into Fed rate cut — and it’s working
Things have been looking good for small-cap stocks of late. The Russell 2000 on Thursday closed at a record high, topping its previous all-time peak set in 2021. The benchmark is also on pace for its seventh straight week of gains, which would be its longest weekly winning streak since 2020. Traders had been piling into small caps in recent weeks as they anticipated the Federal Reserve resuming its rate-cutting cycle this month. Indeed, the Fed lowered its overnight lending rate by a quarter-percentage point. History shows that rate cuts following a long pause in an easing cycle have given a big boost to smaller names. The small-cap index has returned on average 35% over a 12-month period after the Fed cuts rates following a cutting cycle pause that lasted at least 126 trading days , Canaccord Genuity said ahead of the Fed’s announcement. .RUT 5Y mountain Russell 2000 5-year chart The technical case for small caps looks favorable as well. Frank Cappelleri, founder of CappThesis, said in a note Friday that the iShares Russell 2000 ETF (IWM) , which tracks the small-cap index, has reached an “inverse head-and-shoulders pattern target that was triggered in early June.” This move sets up IWM for a potential run to around $280, or 14.4% above Thursday’s close, he said. But, as Cappelleri notes: “The obvious question now is whether IWM can finally follow through above the 245 zone, something it has struggled to do in the recent past. While it did notch a new all-time high, it did so by the slimmest of margins.” He added, however, that “no matter what the ultimate gain proves to be from here, there is clear precedent for meaningful follow-through in the months — and potentially years — ahead.”
<
