Small caps just hit levels not seen in nearly three years

Small-cap stocks are looking very good right now. The iShares Russell 2000 ETF (IWM) , which tracks the small-cap benchmark, closed at its highest level since November 2021 on Wednesday after rising 1.7%. The exchange-traded fund is now on a four-session winning streak and is less than 8% away from reaching its all-time high. The key catalyst for this recent strength has been the Federal Reserve. The Fed last month began a rate-cutting cycle with a half-point reduction. Lower rates can boost smaller companies by allowing them to borrow money for cheaper and expand their businesses. With the rate cuts, investors are now betting the economy will skirt a recession. Smaller companies are more vulnerable to economic cycles. IWM mountain 2021-11-01 IWM since late 2021 Wall Street traders are also pricing in further rate cuts. The CME Group’s FedWatch Tool shows a 92% probability for a quarter-point cut in November. It also shows fed funds futures indicate an 86% chance of another 25 basis point trim in December. Despite this recent strong performance, small caps are still lagging their large-cap counterparts for the year. IWM is up nearly 13% in 2024, while the S & P 500 has soared 22% during that time. But JC O’Hara of Roth MKM thinks there could be a “catch-up trade into year-end which would benefit smaller cap growth companies.” The firm’s chief market technician highlighted in a Wednesday note several small-cap stocks that are poised to do well going forward, including Hanesbrands, Dime Community Bancshares and tech name Insight Enterprises. Some on the Street are pointing to another driver for small caps: the potential of a Trump victory on Election Day. “We believe that the chances that Trump will win the election are far higher than what is priced in to stock prices,” Eric Johnston, chief equity and macro strategist at Cantor Fitzgerald, wrote in a note this week. This comes as recent polls show former President Donald Trump and Vice President Kamala Harris are in a dead heat heading into the Nov. 5 contest. “With a Trump win, we would expect this will benefit domestic companies due to 1) lower tax rates 2) similar or greater spending than current 3) China product tariffs making U.S. goods more attractive 4) less financials and overall small business regulation,” he said. Note: Cantor CEO Howard Lutnick also serves as co-chair of Trump’s transition team.