Fed rates and small cap stocks: Wednesday's Market Takeaways

As the three major market indices (^DJI, ^IXIC, ^GSPC) closed Wednesday higher in unison, the S&P 500 managed to inch out another all-time high. Yahoo Finance Markets Reporter Josh Schafer joins Market Domination Overtime to go over how markets are reacting to the Federal Reserve's interest rate timeline a week after officials' decision to pause rates, highlighting the opportunities emerging from small-cap stocks in the Russell 2000 (^RUT).

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JOSH SCHAFER: Yes, we got the S&P 500 at a fresh record high. But I was watching some sectors within the S&P 500 that Jared was just highlighting and just some other movement that we saw in the market. Because, again, we saw movement sort of away from some of the crowded trade that we've been talking about in tech as you guys were just referencing with NVIDIA. And some of the sectors that had really lagged to start this year seemed to pick up at least a little bit of steam today.

I'm looking at utilities and real estate both had good days today. Both up more than 2%. Those were the biggest laggards on the year headed into the day.

Russell 2000, also having a nice day. Up about 1.7%. Even the equal weight, S&P 500 catching a little bit of a bid today outperforming that market cap S&P 500 that we often talk about. And it's just interesting to me something strategists have been flagging in conversations over the last 24 hours here, is just people looking to put money to work in areas that are a little bit less crowded.

Essentially, we've had this long rally. We're talking about this five month rally. And now, you're just seeing people go shopping and take out their shopping carts and look for something that maybe hasn't rallied as much.

JOSH LIPTON: Right.

JARED BLIKRE: Because it didn't exist a week ago. But yeah, that's kind of what's happening. If we take a look at the Wi-Fi interactive here, I have a chart of the Russell 2000 IWM, ETF.

And you can see we just closed at the highest level there and how long. That's going to be over 52 weeks. This goes back two years. Let's make this a five-year chart.

And you can see the Russell 2000 here has been going sideways forever. And it's just barely breaking out. We haven't really got that big breakout day yet.

Maybe that'll be maybe in hindsight that'll be today. But I got to think there's going to be a run at these record highs sometime in the small caps. And it seems like this is maybe their time to shine.

JOSH SCHAFER: And Jared, I saw Ryan Detrick making this point out on X. Today and it was interesting to me. So much of the conversation around the Russell has been about rates. And we've been talking well when the Fed cuts. That's going to be a good situation for small caps.

And he's pointing out, maybe investors are starting to catch on to the other reasons you would buy small caps. The economic data we've been looking at that has been picking up overall. And just simply as Jared just pointed out, it's one of the few indexes you can look at right now that is well off an all-time high.

And when you're talking about just a valuation trade and maybe a place for opportunity, you wonder if people are going to chase that to some extent if we do continue to see this positive economic.

JOSH LIPTON: Yeah, it's the macro then we were talking, Jared, at the start of the show with George Patterson. And he specifically called out the small caps.

JARED BLIKRE: And the micro caps, too.

JOSH LIPTON: And micro caps, too. And I think for him he, was just kind of looking at the fundamentals. And we were asking him what sectors would you be looking at. And he was saying, maybe biotech, had a pint-sized biotech players.

Because he was saying you look through there. You can find some positive pipelines. And then obviously he was talking to I think, Jared, with big pharma and their balance sheets.

JARED BLIKRE: Because biotech is a lot of micro caps and small cap companies. And you look at their charts over time. Sometimes they look like heart monitors because they're going up and down so quickly on those FDA announcements. But those are the fundamentals.

JOSH SCHAFER: Biotech, Jared, of course. It fits into the narrative. One thing that hasn't been going up and down as much guys that I wanted to highlight here, and I know Jared is also a big fan of the MOVE index, and it's been interesting to just see interest rate volatility has significantly come down in the last couple of months.

And I was talking to Binky Chadha over at Deutsche Bank. And he was highlighting--

JOSH LIPTON: I love you just dropped names. Talking to Binky. The guy at DB.

JOSH SCHAFER: He was highlighting to me, Josh.

JARED BLIKRE: Are you friend of Binky?

JOSH SCHAFER: Yes, he's a friend of the show. We should say friend of a friend of Yahoo Finance, friend of the show, Binky, was highlighting that he thinks this is a key thing that's happened over the last couple of months because he thinks markets are becoming a little bit less worried about uncertainty around the Fed.

He said we went from seven cuts to three cuts. We withheld it. Now, what's your worst case scenario? We take three more cuts off the table.

JOSH LIPTON: How many strategies? How many strategies if you would say? We've asked them, what about if there's no cuts? And I don't hear a lot of worry.

JOSH SCHAFER: No, I keep asking every-- I keep asking everyone that. A lot of people are not. Jared, why are you worried?

JARED BLIKRE: This is why I lose sleep at night. Because I think that inflation is on the uptick here. You look at the three-month, you look at the six-month rates.

The year-over-year is a flatline. They're no longer going down. So if inflation isn't going down, the shorter-term measures are going up.

Well, I got to think that a re-ignition of the economy is possible. This is MOVE index. This is perfect.

This is a five-year look at bond market volatility. And here is the spike that we got in the pandemic. And here is the regional bank panic.

You can see that was even more of a big deal for the bond market. But what's critical here is that we had a support in place for a number of years that has now just been broken to the downside. And this is a signal to me that there's not as much concern over the bond market.

My concerns, why I'm losing sleep at night because of the Fed? Maybe, well, the bond market's not concerned about this. So I think this fits in with the overall narrative.

Why are small caps? Why is crypto why is Reddit rallying right now? It's because, well, that's kind of the zeitgeist.

JOSH SCHAFER: Right. And then if we get a massive shift, what happens to that trade? And then something that another strategist pointed out to me is maybe you get that move back into defensives which we've seen.

JARED BLIKRE: Well, that's the problem is that since nobody's expecting the Fed to accelerate or the economy to re-accelerate such that the Fed is caught behind the eight ball, that repricing would be very painful. But we don't know if that's going to happen.

JOSH SCHAFER: Josh, we're always too positive after the close. You're often pointing this out to us. I think we just got some-- I think we just got some bearishness and we got some negativity.

JOSH LIPTON: I know. The skepticism.

JARED BLIKRE: That's by Jared Blikre--

JOSH LIPTON: From the Miami native.

JOSH SCHAFER: Yes.

JOSH LIPTON: Yeah.

JOSH SCHAFER: We got to have Jared with us more.