Russell 2000

Last week I set up a huge position in the Russell 2000.  I did a big writeup on why and a couple of talks on this.  I am recommending a play on the Russell 2000 for anyone that might be interested in this sort of thing and has the availability to move some funds around.

The likelihood of a FED interest rate cut is that it is finally happening.  The R2K has dropped, along with the other indices.  There has been a shift or ‘rotation’ away from the MAG7 type of stocks and the folks are looking to rebalance their portfolios.

The R2K reacts more positively to a FED rate cut than the other indices, normally.  It looks as if the inflation is set up to fall quite drastically, and this will also benefit the small cap stocks.

The PCE data is seemingly pointing to multiple near-term rate cuts.  There is a lot of ‘pressure’ on the FED to make these cuts and instill more confidence in the economy.  There really does not seem to be any new drivers for an increase in inflation at this time.

Friday is a key date for a lot of this data to shakeout, I think.

So, I am simply recommending if folks are interested that they get out ahead of this to capture more of the potential move.

I think the likelihood of a July cut is small because Powell usually will ’telegraph’ this sort of thing.  But, just in case, the cut(s) come sooner than later, I think this is a great time to pivot funds into a small cap Fund(s).  There could be an urgency to say that the FED does not need to wait until September to start with the cut(s).  

For sure, there may be some political cause to this.  But, I see it as fairly minimal (maybe 10-25%) reasoning.  The overwhelming reasoning is standard fundamentals and past history.

By the end of the summer, I can see an increase of 20-50%.  I really could see a 10-15% increase in August alone.

The biggest casualties when the FED started to raise rates were the small cap stocks.  So, if the FED does pivot it stands to reason that it will benefit the small cap stocks when the money becomes cheaper.

In the first 12 months after a FED rate cut after an extended period of high rates, the small caps have drastically out-performed the other indices.

For example, for the 1st 3 months small caps have returned 11% compared to 5.5% for large caps.

In the 1st 6 months, the small caps have returned 14% versus 9.5% for large caps.

In the first 12 months, the small caps have returned 27% versus 15.5% for large caps.

So, the earlier you can make the move the more of the move you can capture.

You have to look also at where the money will be coming from.  The firms that have had their client’s funds in money markets in a 4-5% situation for a while are under pressure, due to underperforming, will see this as a chance to make a quicker recovery.  There will be some shifting from the big stocks but not as much because people still want to maintain positions in the large stocks.  They will see this as a better catchup opportunity than the S&P, which may make 5-12% this year, which will still be lagging the market.  So, if they shift the money market type things into IWM, R2K, small cap things they know it is a lagging sector.  Therefore, they will have a chance to make the ground up on the small caps.

So, if you consider where that amount of around $6 Trillion dollars is likely to be moved to when the rates come down, I think a large portion of that has to go to the lagging markets that are expected to jump more.

The upside is just too obvious and tempting.  The current data and past history back it up as well.

As the economic data improves there could be even more than the expected 2 or 3 cuts as well.

For example, what if the data Friday is far better than expected.  There will be an enormous amount of pressure on the FED to cut rates now, instead of waiting for 2 more months to do it.  

The whole idea of a ‘soft landing’ is that the FED lowers rates before anything breaks.

This is, of course, not for everyone.  A lot of people are too risk-averse and prefer to simply stay with the S&P funds completely longterm.  That is fine.  

You should never be trying to time the markets.  But when the odds are in your favor you should be willing to take advantage with minimized risk.

When the play (like in sports betting) is positive EV, I think you have to make it.

This is a great situation to make a massive return in a very short period of time with low risk.

Just some things to think about for those that consider these sorts of things.

 I did re-position into Russell and equal weight S&P 500 fund or RSP a short time ago.

With the Fed being aggressive lowering rates I'd expect a good return from both.

The PE's for the Russel 2000 are inexpensive, they haven't been driven up to expensive levels like the tech stocks, chip stocks have been.

I was riding the nasdaq and chip stocks for awhile with very nice returns.

Good advice Raiders .................

Good write-up Raiders...  I think your rationale was spot on ; it's just so darn difficult to predict the "neutral rate" for interest rates.  It appears that that number is quite a bit higher than predicted 3 months ago when you posted this.   I just looked at a chart on the Russell 2000 and see that it is slightly down in that 3-month time frame.   In the last few weeks, the 10-year Treasury has shot up, perhaps in anticipation of a Trump victory, perhaps the Bond vigilantes are rearing their ugly head with all our debt.  There are so many factors that go into the 10-year yield, and I think its direction and rapid move has surprised quite a few people, including myself.  Me personally, I don't bet on the direction of the market, and keep 10% in a Mid-Cap Index, and 10% in a Small-Cap , and balance accordingly.  If I  feel an opportunity is out there, I prefer to buy individual stocks when I feel that the market has overreacted to a piece of news specific to that company.  i.e. CRWD was a golden opportunity earlier this year.  

BOL

@Rush51

 Yessir.  Betting on the direction of the market or certain sectors is risky.  You certainly need to have many factors that back it up sufficiently and have a stop-loss and stop-limit, etc. in place if you are concerned about the possibility of being wrong and concerned about it getting out of hand quickly.

Currently S&P since July 25 is up 11.33% and IWM is up 11.03%.  So, essentially the same.

I think the last FED cut was anticipated but there is some concern now about the possibility of not cutting again in December.

But the market now seems more 'settled' now that the election is over.  The market we all know does not like chaos or uncertainty and they now have an economic direction that investors can look forward to.

I think if Harris had won, the movement I expected would have happened a tad earlier.  Now, with Trump having won, the investors may wait a bit longer to make more of the moves that I expect, until after they see exactly what policies will be affected or put in place.

The issue is how much longer before the $6T or so money that has been on the sidelines will jump into the market.  The natural move will then be for a lot of that to go in the small cap stocks.  These have been trailing the major stocks for too long and the investors will now see them as the obvious choice to make up a lot of ground.  

I think you will certainly see a lot of this with some of the larger funds that have clients that have not had the returns that some of the others had because they have been in the safer money market type vehicles.  They will see what they missed out on and see this as a solid catchup opportunity.

It will be very interesting to see if this plays out in the 1st quarter of the coming year.

But, for sure, a large portion that is simply left in the S&P, etc. is fine for most folks longterm.

Raiders22 & Rush51 here is good mutual fund for Russel 2000  JAGLX  

@artdb

 I am not exactly sure what you are saying?

This is mainly a health-type fund.  Not really a small-cap type of fund.

I second what Raiders has said.... this seems to be a healthcare type  fund.

But to address your target comment about a Russell 2000 mutual fund, I'm a big proponent of index investing.   As such , I hold small cap & mid cap index funds to give some allocation to the smaller public companies out there. 

Raider22 - JAGLX Janus Henderson Global Life Sciences / Held it for long term and whenever Russell 2000 went up fund followed. I don't know why I was thing it was in Russel 2000. Check it out has positive gains for last 10 - 15 years.   Oh, by the way lets go EAGLES !!!  

@artdb

 Gotcha.  Yessir, sometimes certain sectors move together.  Sometimes, a rising tide simply lifts all boats.

I do think the JAGLX expense ratio at .92% is slightly higher than some others, like say, VGHCX at .35%. 

But for sure, if it is working for you and you are happy with it, that is great; everyone should have some exposure in that sector.

As far as the Eagles -- I think they go as far as Hurts can take them.  But their defense looks very good.  I am not sure how bad Love's injury was/is.

But the Eagles have the best Pass Rush in the league right now and will get after him.

But the Eagles can beat anyone if they are on top of their game, on both sides of the ball.

@artdb

 Check out XLV.   It's a low cost ETF that gives you exposure to the big   medical/pharmaceutical companies.  It outperforms the Janus Fund, too.

Solid performer.. Have owned it for about 10 years.. 

Thanks, Rush51 don't have to check it, your word is gold / Raiders22 Eagles have formula to beat anyone with time consuming drives. They are loaded on both sides of the ball.  As always thank you both for helping !!!  

NFL Playoffs !   Here we go!