Come on, Russell!
According to Morgan Stanley’s co-chief investment officer, Lisa Shallett, “the summer rally to all-time highs has lifted everything from mega-caps to cheap stocks to meme shares, but now might be time to take some chips off the table.” Small and mid-cap stocks have rallied strongly in recent months, with the Russell 20000 index gaining 15% since April, outperforming the S&P 500. However, the Russell is still below the record highs of five years ago, as small/midcaps have underperformed significantly in the US amidst higher rates.
Lisa Shalett believes now is the time to lock in profits on smaller-cap stocks, along with unprofitable tech firms, and popular meme stocks. “Despite the momentum in small-cap stocks, investors would be best served to walk away now, as many hedge funds have already done”. Ms Shalett believes that the momentum pushing the market forward can persist in the short term, however, “next year will probably be significantly more difficult, particularly for small-cap companies…They’re probably not going to be able to invest in generative AI and compete at a rate that perhaps their larger cap brethren can.”
Ms Shalett makes a fair point, and a corrective pullback in the Russell 2000 along with the major benchmarks would not surprise me if investors “sell the news” next week post the FOMC meeting. The Russell 2000 is encountering overhead resistance at the record highs above 2,440. A corrective pullback is therefore on the cards in my view over the coming weeks.
Come on, Russell! The Russell 2000 has significantly underperformed the S&P 500 over the past six years. However, I expect this underlying trend to change next year.
The overall technical setup is, however, bullish in our view and points to a breakout coming at some point over the coming year. Any correction in the Russell 2000 should it eventuate, would likely find strong buying support below 2,145 in our opinion. Small/mid-caps are going to get a benefit if the Fed cuts rates by 150 bps over the coming year. However, near-term risks point to a correction and likely an opportunistic buying window in the coming months.
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