Investors
are
flocking
to
small-cap
stocks
right
now,
driving
this
segment
of
the
market
to
new
highs
this
week.
The
Russell
2000
index
hit
its
highest
level
of
2,194.46
on
Monday
since
January
2022
when
the
index
traded
as
high
as
2,196.74,
according
to
CNBC
analysis.
The
index,
which
comprises
small-cap
companies
in
the
U.S.
that
derive
most
of
their
revenues
domestically,
rose
more
than
3%
on
Tuesday
for
its
fifth
straight
day
of
gains.
Adam
Turnquist,
chief
technical
strategist
for
LPL
Financial,
said
the
moves
are
“signaling
a
potential
breakout”
for
a
sector
that
has
largely
been
underperforming.
He
also
noted
that
the
Russell
2000
is
outperforming
the
S
&
P
500
by
the
widest
margin
since
November
2021.
But
is
the
rally
sustainable?
Turnquist
pointed
to
the
fact
that
June’s
U.S.
consumer
price
index
declined.
With
the
U.S.
Federal
Reserve
repeatedly
saying
inflation
will
need
to
cool
for
rate
cuts
to
happen,
that’s
good
news
for
smaller
companies
as
they
generally
rely
on
borrowing
to
fund
operations,
he
said.
“As
inflation
cools,
the
expectation
that
the
Federal
Reserve
(Fed)
will
cut
rates
increases,
therefore,
creating
a
lower
cost
of
capital
for
debt-dependent
companies,”
Turnquist
said.
But
according
to
him,
one
group
of
small-cap
stocks
could
do
well
if
rates
were
to
stay
higher
for
longer:
regional
banks.
He
added:
“For
now,
more
immediate
data
points
like
CPI
and
Fed
projections
are
igniting
small-market-cap
names
higher.
However,
at
this
point,
it
remains
to
be
seen
if
a
longer-term
economic
slowdown
will
balance
out
the
recent
step
higher.”
However,
Turnquist
cautioned
that
small-cap
growth
stocks
would
find
the
outlook
tougher
than
small-cap
value
stocks,
as
they
are
more
sensitive
to
economic
health.
Given
those
factors,
it’s
crucial
to
stock
pick
among
small-cap
names,
he
said.
“We
don’t
want
to
miss
spikes
in
price
appreciation
as
we’ve
recently
seen,
but
if
economic
weakness
indeed
persists,
we
want
to
be
positioned
in
more
profitable
segments
of
the
small
caps
and
remain
careful.
The
late-cycle
characteristics
of
this
economy
and
the
increase
in
expected
volatility
require
a
watchful
and
targeted
approach
at
this
point,”
he
explained.
There’s
also
the
Trump
factor,
said
Kelvin
Wong,
senior
market
analyst
at
Oanda,
in
a
July
16
note.
If
former
U.S.
President
Donald
Trump
wins
the
upcoming
U.S.
election
in
November,
he
will
likely
adopt
an
America-first
position
and
focus
on
domestic
firms,
according
to
Wong.
“The
playbook
of
“Trumponomics”
policies
is
likely
to
be
at
the
forefront
under
the
slogan
of
“Make
America
Great
Again”
where
tax
cuts
and
perhaps
subsidies
may
be
targeted
towards
small
and
medium
domestically
oriented
firms
in
the
US
which
in
turn
improve
their
profitability
prospects
that
may
further
boost
the
bullish
sentiment
towards
Russell
2000,”
said
Wong.
But
Citi
cautioned
that,
according
to
history,
small-cap
stocks
tend
to
underperform
before
the
first
rate
cut,
and
outperform
only
after
that
happens.
“This
would
also
suggest
that
the
big
rotation
from
large
caps
into
small
caps
may
not
have
that
much
follow-through,”
Citi
analysts
wrote
in
a
July
11
note.
How
to
play
small-caps
Investors
who
have
been
making
a
play
for
small-caps
include
billionaire
Stanley
Druckenmiller
,
who
revealed
a
big
bullish
position
in
small-cap
stocks
last
quarter.
He
bought
call
options
against
3,157,900
shares
of
the
iShares
Russell
2000
ETF
(IWM)
for
a
stake
worth
$664
million.
According
to
FactSet,
the
iShares
Russell
2000
ETF
has
potential
upside
of
14.4%
to
the
consensus
price
target
given
by
analysts
covering
the
exchange-traded
fund.
David
Dietze,
senior
investment
strategist
at
Peapack
Private
Wealth
Management,
said
this
ETF
is
the
“easiest
way”
to
play
small-caps.
“The
expense
ratio
of
the
fund
is
quite
low,
at
0.19%,
and
you
are
diversified
over
nearly
2000
stocks,
with
no
one
stock
representing
even
one
half
of
1%
of
the
fund.
Great
liquidity
and
if
small
caps
do
well
this
will
participate,”
he
told
CNBC
Pro.
Among
stocks,
he
likes
apparel
maker
VF
Corp,
which
owns
brands
such
as
The
North
Face,
Timberland
and
Vans.
“Despite
its
small
market
cap
size
it
designs
and
distributes
its
lifestyle
products
globally,”
said
Dietze,
adding
that
the
stock
has
climbed
nearly
50%
from
its
recent
low
despite
continuing
challenges
in
the
retail
sector.
Dietze
also
likes
medical
devices
maker
Organon,
which
has
been
“largely
ignored”
but
is
also
up
nearly
50%
this
year.
“It
…
has
more
debt
than
perhaps
is
optimal
so
OGN
could
also
benefit
from
easier
monetary
policy
by
the
Federal
Reserve,”
he
added.
Jay
Hatfield,
chief
investment
officer
of
InfraCap,
likes
small-cap
dividend
stocks
in
particular.
He
names
two:
investment
bank
Jefferies
and
Kilroy
,
which
owns
office
real
estate
in
the
tech
and
life
sciences
industries.
Jefferies
has
benefited
from
a
pick-up
in
merger
and
acquisition
activity,
while
Kilroy
will
benefit
from
artificial
intelligence
trends
and
back-to-office
mandates,
Hatfield
said.
—
CNBC’s
Yun
Li
contributed
to
this
report.
