Flavor of the Month: U.S. Small-Cap Stocks

Since the beginning of the month, the Russell 2000 (IWM), the benchmark index for small-cap stocks in the United States, has increased by 8.5%.

This can be attributed to the release of encouraging inflation data in the United States, suggesting a likely first rate cut by the Federal Reserve in September (94% probability as of July 22).

Additionally, Donald Trump is leading in the polls for the next U.S. presidential election. It is worth noting that in 2016, the Russell 2000 gained 13.6% between Trump's victory and the end of the year due to the announcement of a corporate tax rate cut, which spurred a rally in more cyclical sectors.

For reference, here is the performance recorded by four sectors of the S&P 500 between November 8 and December 31, 2016: Financials (+16.3%), Energy (+8.7%), Industrials (+6.9%), and Materials (+5.2%). Given that these sectors represent about 40% of the Russell 2000's weighting, it's no surprise that we are seeing such enthusiasm for this index.

Furthermore, an analysis by DataTrek indicates that search volume in the United States for IWM on Google Trends shows unusual attention.

In the image below, we see that searches for IWM (in blue) have recently reached a five-year high. The only comparable spike is the search peak for IVV (in red), an index that tracks the S&P 500's performance, during the bear market at the height of the pandemic in March 2020.

Source: DataTrek Morning Briefing. S&P Intl Revenues, Post-2016 Election Returns, NAS Pullbacks, July 22, 2024.

However, search volumes for IWM last week were 50% higher than those for the S&P 500 product four years ago.

So, this question arises for the IWM: is this the beginning of a new upward movement or just a passing interest?

Of course, I leave it to each person to draw their own conclusions.