The little guys are suddenly making a big push in the stock market. In what the Wall Street Journal calls a market rotation of "historic proportions," the last few weeks have seen small-cap stocks surge ahead of the big boys i.e. Google, Amazon, Meta, etc. In fact, the Russell 2000 index of smaller stocks beat the S&P 500 in a one-week period by the largest margin since at least 1986. During the week, the small-cap index rose by 1.7%, while the S&P 500 fell by 2%.
This sudden flip of the markets in favor of small-caps is not tied to politics, which have been heightened in an election year, but rather to the Federal Reserve. "Last week, we saw the Russell 2000 small-cap index outperform the S&P 500 large-cap index by its widest margin in decades," says KTRH Money Man Pat Shinn. "The reason is the markets are quickly pricing in the Federal Reserve will indeed start cutting interest rates at their September meeting."
"A rate cut by the Federal Reserve is very bullish for small size company stocks," Shinn continues. "One of the reasons is that those small companies are the biggest borrowers, so if the Fed cuts rates then lending rates will drop, and that's going to benefit small size companies the most."
Indeed, the surge in small-cap stocks started right after a better-than-expected inflation report came out on July 11th. "And now, the markets are pricing in nearly 100% odds of a September rate cut," says Shinn.
Photo: AFP