Yahoo finance | Why the Russell 2000 has been soaring

Why the Russell 2000 has been soaring

 

Small cap stocks, as measured by the Russell 2000 index (^RUT), saw their biggest single-day gain of 2023 on Tuesday. The index surged 5.2% as the risk-on rally extended to small caps. The broad market advance was sparked by October's cooler-than-expected CPI report, which boosted hopes of less aggressive Fed rate hikes going forward.

Yahoo Finance's Madison Mills breaks down all the details.

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AKIKO FUJITA: Well, the market rally is extending to small caps as the Russell 2000 continues to climb today, but will small caps have much more upside? We've got [? Maddie ?] Mills with a breakdown. [? Maddie, ?] this is something that we have heard from so many guests who are saying we're very bullish on small caps moving forward. What's the longevity?

MADISON MILLS: Right, that's the million dollar question here, Akiko, right? We are seeing this rally over the past couple of days, but does it have legs? I want to just explain the context behind this rally that we're seeing here. Obviously, this is when we got that CPI print yesterday, seeing a 5.4% rally in the Russell 2000, marking the highest day in the year for that index, but also continuing into today. We thought maybe we'd see a little bit of traders getting out of that play today, but we're still seeing that longevity.

Now, I do want to compare it to some of the other mega cap indices year to date. If you look at the S&P, up 17% year to date. Now, we look at the NASDAQ, up 35% year to date. And then I go over to the poor Russell here, only up 3.6% year to date.

So the question is why are traders rushing into this? Well, hedge fund managers that have dry powder that have been sitting on the sidelines this year, it's November, they've got to prove returns to their clients heading into the end of this year. So they're looking at the Russell and they're saying these are some companies that have lower valuations, good fundamentals, lower valuations than their counterparts in large caps that you're going to see in an index like the NASDAQ. And it's a great place for them to maybe have a catch up trade.

And that's part of what goes into something that we call the January effect from a technicals perspective. If you look at the Russell 2000, going back to 1979 here, right, you see that it typically has a rally heading into January. And so that January effect could be a boon for, again, anyone who's been a little bit on the sidelines hoarding some cash as there's been a little bit more market volatility amid these Fed rate hikes.

RACHELLE AKUFFO: And that certainly tracks from a technicals perspective, but what about the fundamentals when it comes to small caps?

MADISON MILLS: Yeah, it's so interesting. Our colleagues in the 3 to 5 show, Josh Lipton and Julie Hyman were talking with Eric Green yesterday about this. And he made a great point that these small cap names in the Russell 2000 might be able to do a little bit more deal making as we head into next year, again. Particularly if the Fed does start to pull back on rate hikes, we might see a little bit more investor sentiment and company sentiment rather to get in on some dealmaking, some M&A. And that could lead to higher fundamentals for these small cap names.

And again, the valuations are there. They're pretty solid. The fundamentals are looking good. Investors say that the Russell 2000, every single sector is expected to grow in the fundamentals heading into the end of this year. So that could be a boon for traders heading into 2024.