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Asset Watch
Thursday, September 19, 2024
While bigger has been better for the last few years, with heavyweights like NVIDIA, Apple, Amazon, Netflix, Meta Platforms, and Microsoft generating robust returns, the next several months could produce a material shift.
Even though the Russell 2000 has underperformed the NASDAQ 100, rate cuts are often bullish for small-cap stocks. So, could the laggards become leaders alongside lower interest rates?
Because small companies generate most of their revenues domestically, they’re highly influenced by the U.S. economy. Therefore, lower interest rates could help stimulate demand and improve profit margins by reducing borrowing costs.
“Small caps often do well in a cutting cycle,” said Liz Ann Sonders, Chief Investment Strategist at Charles Schwab. “[They] got a lift when the Fed definitively signalled a move to easier policy,” plus “we’re not in a recession [and] the economy is doing pretty well.”
Add it all up, and rate cuts could help the Russell 2000 gain ground versus the S&P 500 and NASDAQ 100.
After struggling from 2022 through early 2024, the Russell 2000 broke out above resistance and successfully retested the breakout during the August 2024 panic. The index has since turned weekly resistance into support, contributing to the constructive outlook.
On top of the multi-year breakout, the Russell 2000 also has rising support from the upward-sloping white line and the rising blue line (the 30-week MA). The latter largely ended the corrections in April, June, July, and September 2024, and the metric signals higher highs the longer the Russell 2000 trades above it.
Consequently, the index’s technical and fundamental backdrops are moving in positive directions.
Since everyone is preparing for the FOMC decision on Sep. 18, heightened volatility may materialise during Chairman Jerome Powell’s press conference. In other words, the price action could shift drastically throughout the day.
However, the Russell 2000’s weekly chart highlights how the medium-term outlook remains solid, and a pullback to the 30-week MA or trendline support could be attractive entry points.
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