By Daniela Sabin Hathorn, senior market analyst at Capital.com
The effects of Donald Trump’s election as the 47th President of the United States continue to show in markets. The major US equity indices have remained bullish since last Tuesday when they broke away from a period of sideways consolidation driven by uncertainty prior to the elections.
The move has been broad-based with bullish appetite ranging from large tech stocks in the Nasdaq to the smaller cap stocks in the Russell 2000. Economic and corporate fundamentals remain at the forefront of investor concerns and the prospects of further growth stimulus under the Trump administration has been well received by investors. The fact that the Federal reserve lowered rates once again on Thursday – as expected – also helped cement the positive sentiment for traders.
Powell and his team clearly tried to avoid giving anything away at the meeting last week, deferring to December’s summary of updated projections as the next likely source of forward guidance. This will give the central bank time to digest the implications the change in presidency will have on policy decisions. But markets seemed to take the FOMC obedience in doing what was expected of them as a further driver in the bullish breakout.
If more rate cuts from the Fed continue to be what is expected, then we could see further positive sentiment in US stocks. This could favour smaller stocks over the big corporations as they tend to be more sensitive to changes in financial conditions and rates. These companies also tend to be more geared towards domestic consumers, which could mean they are slightly more shielded from Trump’s possible tariff plans, whilst benefit from tax cuts. The possibility of reduced regulation could also benefit smaller banks included in the index. The expectations of a positive outlook following the elections are evidenced by the Russell 2000’s 10% gain since the start of last week. For comparison, the Nasdaq and the S&P 500 are up 6.6% and 5.6% respectively. Zooming out and looking at the year so far, we can see that the smaller cap stocks have been lagging the big corporations with the Russell 2000 up 19.3% year-to-date versus 26.4% and 28% the S&P 500 and Nasdaq.
Russell 200 vs Nasdaq and S&P 500 daily chart
Past performance is not a reliable indicator of future results.
Technically, the outlook for the Russell 2000 seems a little bit overextended in the short-term with the RSI pushing past the overbought level on the daily chart. On a wider timeframe we can see that on the weekly chart the index still has some room to go before being overbought but it is nearing its all-time high (ATH) from November 2021, which could mean some trouble is up ahead. Monitoring its performance over the next week will be key to see how traders handle any selling pressure that may come around the ATH. Traders will also want to keep an eye out for the US CPO data released later this week.
Russell 200 weekly chart
Past performance is not a reliable indicator of future results.
