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The main index of small US stocks hit a new record on Monday for the first time in three years, as investors bet that Donald Trump’s election victory would jump-start their performance after years of lagging behind larger peers.
The Russell 2000 rose more than 2 per cent to as high as 2466.48, buoyed by a broad market rally as Trump’s selection of Scott Bessent as Treasury secretary eased investor concerns that the president-elect would bring in sweeping tariffs that hit economic growth.
The index has climbed nearly 10 per cent since the election day, eclipsing its previous peak of 2458.86 set in November 2021, amid expectations that domestically focused smaller companies have the most to gain from Republican policy priorities such as corporate tax cuts and deregulation.
“People have been looking for a catalyst for small caps, and maybe the outcome of the election was the spark they needed to really get going,” said Francis Gannon, co-chief investment officer at Royce Investment Partners, a subsidiary of Franklin Templeton that focuses on small caps.
“It has taken us a long time to get back to this point while other indices were hitting new highs,” he added, but “I believe that the underperformance period is over, and if earnings continue to pick up we will see them outperform going forward.”
The Russell 2000 was particularly badly hit over the past few years by rising interest rates and fears about a potential recession, as smaller companies tend to have higher levels of indebtedness and are more exposed to the domestic US economy compared with larger groups.
At its nadir last year, the index had dropped as much as a third from its peak, but it has rebounded over the past 12 months as the economic outlook has improved and the Federal Reserve started cutting interest rates.
Its recent resurgence has coincided with a broader shift in investor attention towards rate-sensitive sectors after a few massive tech stocks drove the majority of market gains in the first half of 2024.
Laura Cooper, head of macro credit at Nuveen, said the appointment of a “market friendly candidate” to run the Treasury had boosted risky assets.
“Bessent is adding some conviction to overall rotation [from larger stocks into smaller ones],” she said.
The Russell 2000 and the equal-weighted version of the S&P 500 are still lagging the market cap-weighted S&P 500 for 2024 overall, but have outperformed so far in the second half of the year.
Small caps’ high debt levels could make them vulnerable to a resurgence in inflation that disrupts the Fed’s plans for further interest rate cuts. Economists and high-profile investors including Pimco chief investment office Dan Ivascyn have cautioned that Trump’s economic plans could lead the US economy to overheat and drive up prices.
“Small caps need growth but they can’t really handle much higher rates because there’s a lot of leverage and shorter-term debt, and they’re also sensitive to increases in input costs,” said Sebastien Page, head of global multi-asset at T Rowe Price.