The Russell 2000, which tracks small-cap stocks, recently had a major rally following better-than-expected inflation data two weeks ago. How significant was this rally? The Russell 2000 surged 11.5% in just 10 trading days, marking one of its best 10-day performances ever, rivaling the post-election surge in November 2020.

Looking back, there have been 23 other instances where the Russell 2000 gained at least 10% in 10 trading days. The results?

Historically, the index was higher a year later over 86% of the time, with an average increase of nearly 27%. This should bring some much-needed optimism to long-suffering small-cap investors.

Recently, small caps outperformed the Russell 1000 Index of large caps by over 5% in just five days. Historically, this kind of outperformance often signals continued strength in small caps, with the Russell 2000 being higher a year later 80% of the time and up by an average of more than 16%.

And just because small-caps are moving higher doesn’t mean large caps won’t see gains as well. In fact, the Russell 2000 recently outperformed the Russell 1000 by more than 8% in 10 days, a rare event. Only four other times have we seen this, and the S&P 500 was up an average of 20% a year later in three out of those four instances. The exception was March 2000, at the peak of the tech bubble. Still, these indicators suggest the potential for a solid second half of the year.

Additionally, more than half of the S&P 500 components hit new 20-day highs recently, indicating broad market participation in this bull run. Historically, when the S&P 500 has this level of overbought conditions, it tends to be higher 25 out of 28 times a year later, with an average gain of nearly 12%.

While we should brace for some volatility in the historically weak months of September and October, especially in an election year, it’s important to keep perspective. Despite potentially rocky times ahead of the election, the strong economic data and market performance so far suggest resilience.

The economy grew at an annualized pace of 2.8% in Q2, well above expectations and showing impressive resilience despite aggressive rate hikes. This “goldilocks” GDP report, with solid growth but not excessive, supports the idea that the Fed may hold off on rate cuts tomorrow until September.

While GDP data might be seen as stale, it remains a critical measure of economic activity. The strong consumer spending, equipment investment, and government spending contributions indicate underlying economic strength, even as interest rates remain high.

In summary, while risks have increased, there’s still significant strength in the economy. However, with restrictive interest rates and ongoing disinflation, the Fed needs to focus more on employment risks. While a July rate cut seems unlikely, a cut in September could be on the horizon.

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Source: https://x.com/RyanDetrick/status/1817571701288468631

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