Small Caps Are the Market's Levered Fed Bet
The Russell 2000 sits more than 25 percent above its 52-week low with the rate outlook unsettled. That is a position, not a forecast.
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Small Caps Are the Market's Levered Fed Bet
The Russell 2000 sits more than 25 percent above its 52-week low with the rate outlook unsettled. That is a position, not a forecast.
MICHAEL A. GAYED, CFA
Key Highlights
- The Russell 2000 closed at 2,903.94 on Sep 11, within roughly 5 percent of its 52-week high of 3,069.71.
- Its 52-week range runs from 2,303.46 to 3,069.71, a band more than 30 percent wide.
- Small caps carry the highest sensitivity to the cost of money of any size cohort, because floating-rate debt is a larger share of their capital structures.
- With the Fed easing while the long end refuses to follow, small caps are long the front of the curve and short the back of it simultaneously.
The surface story is a strong small-cap year. The real catalyst is that the strength is not a growth story at all. It is a levered position on the shape of the yield curve, held by investors who mostly do not think of themselves as rates traders. When a cohort trades like a bond, it should be underwritten like one.[1]
The Russell 2000 closed at 2,903.94 on September 11, within roughly 5 percent of its 52-week high of 3,069.71, and more than 26 percent above its 52-week low of 2,303.46.[1] Indexes do not travel a 33 percent range on earnings revisions. They travel it on the discount rate. Reindexed against the S&P 500 over the past 13 months, the two tracks show the same underlying exposure with different leverage: the small-cap line swings wider on every shift in rate expectations, exactly as a higher-duration instrument should.
