Tag: Russell 2000

Small Cap Stocks Could Soar Next – Here’s Why the Russell Rally May Be Imminent

Posted on by slightbourne@noblecapitalmarkets.com

The major U.S. stock indexes have been on a tear in 2024, with the S&P 500 and Nasdaq Composite recently locking in fresh 52-week highs. However, one area of the market that has yet to fully participate in the rally is small-cap stocks, as represented by the Russell 2000 index. While the Russell 2000 is still up around 4% year-to-date, it has significantly lagged the double-digit gains of its large-cap counterparts.

This underperformance from smaller companies may seem perplexing given the robust economic growth and strong corporate earnings that have powered stocks higher. However, there are a couple potential factors holding small caps back for now.

First, investor sentiment remains somewhat cautious after the banking turmoil of 2023. While the systemic crisis was averted, tighter lending standards could disproportionately impact smaller businesses that rely more heavily on bank financing. Recent upticks in loan activity provide some optimism that credit conditions may be thawing.

The other overhang for small caps has been the aggressive interest rate hiking cycle by the Federal Reserve to combat inflation. Higher borrowing costs weigh more heavily on smaller companies compared to their large-cap peers. However, the Fed is now expected to pivot towards rate cuts later in 2024 once inflation is tamed, providing a potential catalyst for small-cap outperformance.

Historically, small caps have tended to lead coming out of economic downturns and in the early stages of new bull markets. Their higher growth orientation allows them to capitalize more quickly on an inflection in the business cycle. A timely Fed pivot to lower rates could be the rocket fuel that allows the Russell 2000 to start playing catch-up in the second half of 2024.

For investors, any near-term consolidation in small caps may present opportunistic entry points in this economically-sensitive segment of the market. While volatility should be expected, the lofty valuations of large-cap tech and momentum plays leave less room for further upside. Well-managed small caps with pricing power and secure funding could offer asymmetric upside as the economic landscape becomes more hospitable in the latter part of the year.

For long-term investors, any potential small-cap rebound could be particularly compelling given the cyclical nature of small versus large-cap performance. Over decades of market history, there has been a tendency for leadership to rotate between the two size segments. After large caps dominated the past decade, buoyed by the tech titans and slow-growth environment, the economic restart could allow small caps to regain leadership.

From a portfolio construction standpoint, maintaining exposure to both small and large caps can provide important diversification benefits. The low correlation between the size segments helps smooth out overall equity volatility. And for investors already overweight large caps after years of outperformance, trimming some of those positions to reallocate towards small caps could prove timely.

While major indexes continue grinding higher, prudent investors should avoid complacency and think about positioning for what could be a new market regime. Small caps have historically possessed a robust return premium over large caps. As the economic backdrops evolves, 2024 may mark the start of small caps returning to form as drivers of broad market returns once again.

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Russell Reconstitution 2024, What Investors Should Know

Posted on by slightbourne@noblecapitalmarkets.com

The Annual Russell Index Revision and Dates to Watch (2024)

The yearly process of recasting the Russell Indexes begins on Tuesday, April 30 and will be complete by market opening on June 30. During the period in between, FTSE Russell will rank stocks for additions, for deletions and evaluate the companies to make sure they conform overall. The methodology for inserting and removing tickers in the Russell 3000, Russell 2000, and Russell 1000 is intentionally transparent to help eliminate price shocks. Price movements do of course occur along the way, and investors try to foresee and capitalize on them. Channelchek will be providing updates that may uncover opportunities, or at least provide an understanding of stock price swings during this period.

Background

Russell index products are widely used by institutional and retail investors throughout the world. There is more than $20.1 trillion currently benchmarked to a Russell index. This includes approximately $12.1 trillion benchmarked to the Russell US Equity indexes. The trading volume of some companies moving into an index will heighten around the last Friday in June as fund managers seek to maintain level tracking with their benchmark target.

Opportunity

For non-passive investing, determining which stocks may benefit from moving up to a large-cap index, down to a smaller one, or into or out of the measurements is an annual event causing volatility around stocks. There has, of course, the potential for very profitable long and short trades. And the potential for an unwitting investor to be holding a company moving out of an index, which could cause less interest in the stock, and perhaps unfortunate performance.

Active investors should make themselves aware of the forces at play so they may either get out of the way or determine if they should become involved by taking positions with those being added or those at the end of their reign within one of the Russell measurements.

Dramatic Valuation Shifts

The leading industries and altered market-cap of companies of a year ago have changed dramatically from last year’s reconstitution. This will be reflected in the 2023 rebalancing and is going to impact a much larger number of companies than most years. That is to say, a higher percentage of companies than normal will move in, out, or to another index, and may be subject to amplified price movement.

The 2024 Russell Reconstitution Schedule:

• Tuesday, April 30th – “Rank Day” – Index membership eligibility for 2024 Russell Reconstitution determined from constituent market capitalization at market close.

• Friday, May 24 – Preliminary index additions & deletions membership lists posted to the FTSE Russell website after 6 PM US eastern time.

•   Friday, May 31st, June 7th, 14th and 21st – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6 PM US eastern time.

• Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

• Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.

• Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

Take-Away

The annual reconstitution is a significant driver of dramatic shifts in some stock prices as portfolio managers have their holding needs shifted within a very short period of time. Longer-term demand for certain equities is altered as well. Sizable price movements and volatility are expected, especially around the last week in June. In fact, the opening day of the reconstitution is typically one of the highest trading-volume days of the year in the US equity markets.

The market event impacts more than $9 trillion of investor assets benchmarked to or invested in products based on the Russell US Indexes. Portfolio managers that are required to track one of these indexes will work to have minimal portfolio slippage away from their benchmark.  The days and weeks from April 30 through the last Friday in June can create opportunities for investors seeking to benefit from price moves, Channelchek will be covering the event as stocks to be added to, or removed from this year’s Russell Reconstitution and other information plays out.

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What Exactly is the Russell Reconstitution?

Posted on by slightbourne@noblecapitalmarkets.com

If you’re an investor, there’s an annual event on Wall Street that you should be aware of – the Russell Reconstitution. While it may not get much mainstream attention, this yearly process can have a major impact on certain stocks and drive significant trading activity.

So what exactly is the Russell Reconstitution? Let’s break it down in simple terms.

The Russell family of indexes is one of the most widely-followed equity benchmarks. The headline Russell 3000 represents the broad U.S. stock market, while the Russell 1000 tracks large-cap stocks and the Russell 2000 focuses on small-caps.

These indexes aim to be an accurate representation of the overall U.S. public market at any given time. However, company valuations and rankings are constantly evolving as businesses grow, stagnate, or decline.

To ensure the indexes stay up-to-date and reflective of the current market, they go through an annual “reconstitution” process of completely rebuilding membership from the ground up.

Each year, the Russell indexes perform this rebuilding exercise based on the latest market capitalization rankings for U.S. public companies after the market closes on a predetermined “ranking day.”

Companies are re-ranked from largest to smallest based on their new market caps. The top x% make up the Russell 1000 large-cap index, the bottom y% are assigned to the small-cap Russell 2000 index, and so on across Russell’s various capitalization-based indexes.

This rebalancing and membership shuffle occurs annually to keep the indexes properly aligned with the ever-changing market landscape. Companies experiencing strong growth may graduate into a higher cap-weighted index, while those losing ground get demoted to lower indexes.

Being added to the Russell 1000 or Russell 2000 indexes can provide a meaningful boost to a stock. These indexes are tracked by hundreds of billions in assets, so inclusion often comes with heightened liquidity, passive fund exposure, and institutional investor interest.

Conversely, stocks being removed from the headline indexes can suffer the opposite effects of reduced volume, investor exits, and volatility as funds rebalance their holdings.

Historically, stocks slated for inclusion in the Russell 2000 small-cap index have enjoyed a “reconstitution rally” in the run-up period as index funds buy in ahead of the official rebalance. Those migrating out often see selling pressure over this pre-rebalance window.

Why the Russell Rebalance Matters

While seemingly an administrative exercise, the annual Russell Reconstitution has taken on outsized significance in recent decades due to the explosion of passive index-tracking investment vehicles and strategies.

As major funds reposition their portfolios to replicate the updated index compositions each year, it creates a temporary imbalance of concentrated buying and selling in the impacted stocks joining or leaving the main benchmarks.

This trading frenzy can unlock rapid changes in volume, volatility, and institutional ownership levels for stocks experiencing an index status change – especially those smaller names making the cut for inclusion in the Russell 2000.

As index funds have grown to control trillions in assets tracking these benchmarks, the annual Russell rebalancing period has become an increasingly important event to monitor, particularly for stocks straddling the cap thresholds between indexes.

What to Watch For

While the Russell Reconstitution operates seamlessly in the background for most investors, those holding impacted stocks may want to anticipate potential volatility and position accordingly in the typical multi-week period ahead of each year’s official rebalance implementation.

The annual event reinforces the profound impact that passive investment strategies can wield on individual stocks simply due to their membership status in closely-tracked equity benchmarks. For better or worse, joining or leaving a major index can drastically alter a stock’s profile and trading dynamics – at least in the short-term rebalancing period.

As indexing grows even more ubiquitous, watching for potential reconstitution impacts could remain a wise practice for active traders and investors holding smaller stocks near the index composition cutoff levels.

2024 Russell US Indexes Reconstitution Schedule

  • Tuesday, April 30th – “Rank Day” – Index membership eligibility for 2024 Russell Reconstitution determined from constituent market capitalization at market close.
  • Friday, May 24th – Preliminary index additions & deletions membership lists posted to the website after 6 PM US eastern time.
  • Friday, May 31st, June 7th, 14th and 21st – Preliminary membership lists (reflecting any updates) posted to the website after 6 PM US eastern time.
  • Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.
  • Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.
  • Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

The Recent Russell 2000 Breakout Rally

Posted on by slightbourne@noblecapitalmarkets.com

The Russell 2000 index has been an overlooked area of the stock market this year, dominated by the headlines and volatility of mega-cap tech and blue chips. However, a seismic shift occurred last Wednesday when the Russell 2000 rallied over 6% for its best day since March, turning positive for 2023.

This index of approximately 2,000 small-cap stocks just made Wall Street wake up and take notice thanks to this violent swing. Now is the time for investors to understand what’s driving the resurgence and how to capitalize in small caps.

What is the Russell 2000 and Why Does It Matter?

The Russell 2000 index measures the performance of U.S. small-cap stocks with market caps below $3.7 billion. Weights are assigned by market cap, so the index serves as a benchmark for bonafide smaller firms. These companies tend to be younger with higher volatility and growth prospects.

As a result, the Russell 2000 provides a barometer of investor sentiment towards risk assets. Turning points in the index can indicate shifts in the overall stock market as traders move towards or away from speculation.

The recent 6%+ rally last Wednesday jolted the Russell 2000 into positive return territory for the year so far, now up 4% year-to-date. This signals a potential appetite for risk returning to markets, with traders betting on outsized returns potential in small caps after a prolonged lull.

Why Invest in Small Caps?

Investing in Russell 2000 companies over other stocks has compelling advantages if timed appropriately in the market cycle. First, smaller firms have lower visibility and coverage, so mispricings are more common. This creates pockets of opportunities for above-average returns compared to efficient larger cap markets.

Additionally, smaller size allows for exponential growth that massive companies simply can’t replicate. A small cap doubling in customers or revenue could lead to a 10X stock return, while a blue chip would move only minimally. This asymmetric payoff profile rewards those willing to take on some extra risk.

Finally, identifying world-changing new products and innovations is easier in earlier stage small caps not yet on the main stage. Getting in early on the next Roku, Tesla, or Shake Shack while still qualifying for the 2000 index can deliver truly explosive portfolio growth.

What Investors Should Watch Next

Markets are now intently watching the Russell 2000 to see if last week’s awakening of small-cap animal spirits has true staying power. Traders want confirmation that the breakout can lead to a sustained run versus just being a short-lived dead cat bounce.

If the rally holds, it solidifies the thesis of rotating back towards risk—and earlier stage small names often lead the way in such environments. Savvy investors will use this volatility to start building positions in promising small caps with expanding growth prospects.

The secret is identifying the next crop of disruptors poised to multiply before the herd catches on. By getting ahead of the crowd now eyeing the Russell 2000’s surge, spectacular returns await those able to time the next leg up.

Bargain Hunting for Small Caps at NobleCon

One of the most effective ways to identify the small caps destined to drive the next market boom is to connect directly with leadership at the source. The annual NobleCon investor conference gives the opportunity for exactly that.

On December 3-5 in Boca Raton, Florida, small-cap firms will present their latest innovations, opportunities, and reasons to invest. Attendees gain first look access to fast-growing startups and tomorrow’s giants while they still qualify for the Russell 2000. Now in its 19th year, NobleCon19 promises to uncover the next crop of small cap innovators during the multi-day conference.

For investors looking to capitalize on the Russell 2000’s resurgence, NobleCon19 provides the direct pipeline to target ideas perfectly positioned to ride the reawakening wave in small caps. To learn more and register, visit www.noblecon19.com before discounted early bird rates expire.

Stock Markets Rally Back: A Beacon of Hope Emerges

Posted on by slightbourne@noblecapitalmarkets.com

After a tumultuous year marked by soaring inflation, rising interest rates, and economic uncertainty, the stock markets are finally beginning to show signs of recovery. The recent surge in the Russell 2000, a small-cap index, is a particularly encouraging sign, indicating that investors are regaining confidence and seeking out growth opportunities. This positive momentum is fueled by several factors, including signs of inflation subsiding, the likelihood of no further rate hikes from the Federal Reserve, and renewed interest in small-cap companies.

Inflation Under Control

The primary driver of the market’s recent rally is the easing of inflationary pressures. After reaching a 40-year high in June, inflation has been steadily declining, with the latest Consumer Price Index (CPI) report showing a year-over-year increase of 6.2%. This moderation in inflation is a welcome relief for investors and consumers alike, as it reduces the burden on household budgets and businesses’ operating costs.

No More Rate Hikes on the Horizon

In response to the surge in inflation, the Federal Reserve embarked on an aggressive monetary tightening campaign, raising interest rates at an unprecedented pace. These rate hikes were necessary to curb inflation but also had a dampening effect on economic growth and put downward pressure on stock prices. However, with inflation now on a downward trajectory, the Fed is expected to slow down its rate-hiking cycle. This prospect is positive for the stock market, as it reduces the uncertainty surrounding future interest rate decisions and allows businesses and investors to plan accordingly.

Capital Flows Back to Small Caps

The recent rally in the Russell 2000 is a testament to the renewed interest in small-cap companies. These companies, often considered to be more sensitive to economic conditions than their larger counterparts, have been hit hard by the market volatility of the past year. However, as investors become more optimistic about the economic outlook, they are turning their attention back to small caps, which offer the potential for higher growth and returns.

Light at the End of the Tunnel

The stock market’s recent rally is a promising sign that the worst may be over for investors. While there may still be challenges ahead, the easing of inflation, the prospect of no further rate hikes, and the renewed interest in small-cap companies suggest that there is light at the end of the tunnel. As investors regain confidence and seek out growth opportunities, the stock market is poised for a continued recovery.

Additional Factors Contributing to the Rally

In addition to the factors mentioned above, there are a few other developments that are contributing to the stock market’s recovery. These include:

  • Strong corporate earnings: Despite the economic slowdown, many companies have reported better-than-expected earnings in recent quarters. This suggests that businesses are able to navigate the current challenges and remain profitable.
  • Improved investor sentiment: Investor sentiment has improved in recent months, as investors become more optimistic about the economic outlook and the prospects for corporate earnings.
  • Increased retail investor participation: Retail investors have been a major force in the stock market in recent years, and their continued participation is helping to support the rally.

The Road Ahead

While the stock market has shown signs of recovery, there are still some risks that investors should be aware of. These include:

  • The possibility of a recession: While the economy is slowing down, there is still a possibility that it could tip into a recession. This would have a negative impact on corporate earnings and stock prices.
  • Geopolitical tensions: The war in Ukraine and other geopolitical tensions are creating uncertainty and could lead to market volatility.
  • Rising interest rates: Even if the Fed slows down its rate-hiking cycle, interest rates are still expected to be higher than they were before the pandemic. This could continue to put pressure on stock prices.

Despite these risks, the overall outlook for the stock market is positive. The easing of inflation, the prospect of no further rate hikes, and the renewed interest in small-cap companies are all positive signs that suggest the market is on a path to recovery. As investors regain confidence and seek out growth opportunities, the stock market is poised to continue its upward trajectory.