Small-cap stocks post longest rally since 2021 after Fed rate cut. What's next?

By Christine Idzelis

Bespoke analyzed how the small-cap-focused Russell 2000 has performed historically after a winning streak as long as the one it just scored.

Small-cap stocks were retreating Friday, following their longest winning streak in three and a half years after the Federal Reserve recalibrated its monetary policy with a big interest-rate cut.

The small-cap focused Russell 2000 Index RUT was down 0.6% in early afternoon trading Friday, after booking seven straight days of gains. The rally marked the index's longest streak of daily gains since March 15, 2021, according to Dow Jones Market Data.

Small-caps led stock-market gains this week after the Fed's half-point rate cut, said Thomas Lee, head of research at Fundstrat, in a note emailed Thursday. "This small-cap strength could be the start of a multi-year cycle of small-cap outperformance."

The Russell 2000 index was up 11.1% for the year through Thursday, after a surge this quarter that included a sharp rise following the Fed's rate decision, FactSet data show. The index on Friday was paring its weekly climb to 2.6% - but still had a bigger gain than the S&P 500 so far this week.

Although the Russell 2000 on Thursday was short of an all-time peak, or a 52-week high, "it did manage to take out its late August high," said Bespoke Investment Group, in a note Friday.

Seven-day winning streaks are "uncommon" for the index since 2003, but not when looking further back in history to 1980, the firm said. Bespoke tracked such rallies in the chart below.

"Three months after seven-day winning streaks since 2003, the Russell 2000's average performance has been a gain of just 0.6% with gains two-thirds of the time." Bespoke wrote. After six months, the index had an average gain of 3% based on history of such rallies since 2003, the firm found.

In initiating the Federal Reserve's rate cut, Fed Chair Jerome Powell "mentioned 'recalibration' multiple times," wrote Lee. In Lee's view, the takeaway was that the Fed is adjusting real rates to keep the business cycle "healthy," which would be supportive for stocks, particularly "small-caps and cyclicals."

The U.S. stock market was mostly lower Friday, after the S&P 500 and Dow Jones Industrial Average each logged all-time highs on Thursday.

The Dow DJIA was up 0.1% in early afternoon trading Friday, while the S&P 500 SPX and the technology-heavy Nasdaq Composite COMP each fell around 0.2%, according to FactSet data, at last check.

-Christine Idzelis

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-21-24 0635ET

Copyright (c) 2024 Dow Jones & Company, Inc.