There is a lot of bullish sentiment surrounding IWM and small caps since they tend to perform well after the Fed pivot. However, we’ve seen a trend where many of these small cap stocks keep diluting investors and their stock prices selloff. My recommended strategy here is to buy after dilution selloffs and to prioritize the small cap stocks that are in strong financial situation. For now IWM has flipped the $209.50 level from resistance into support, and IWM is trying to rally to $233.66. There has been slow progress to the upside with a lot of volatility, the key levels to monitor are $209.46 for support and $233.66 for resistance.
Time Frames Before and After the First Rate Cut:
- Before the Rate Cut:
- 12 months before: Small caps underperform large caps with an average return of approximately -4%, and the hit rate (percentage of times small caps outperform large caps) is low, around 35%.
- 6 months before: The underperformance continues, with a similar average relative return of -4%, and a hit rate that slightly improves.
- 3 months before: The underperformance diminishes but still exists at about -1%, with a hit rate below 50%.
- 1 month before: Small caps start to perform on par with large caps.
- After the Rate Cut:
- 3 months after: Small caps perform similarly to large caps, with a modest positive return of about 1% and a hit rate just above 50%.
- 6 months after: Small caps significantly outperform large caps, with an average return close to 3% and a hit rate of about 60%, showing their strongest relative performance in this period.
- 12 months after: The performance is mixed, with an average positive return but a lower hit rate around 50%, indicating inconsistency in outperformance over the long term.
Key Trend:
- Small caps tend to underperform large caps in the months leading up to the first Fed rate cut, with the worst relative performance occurring 6 to 12 months before the cut.
- Post-rate cut, small caps show strong outperformance, particularly in the 6 months following the rate cut, with over 50% of the time outperforming large caps during this period.
- The outperformance is less consistent 12 months after the rate cut, suggesting more volatility or mixed results in the longer term.
Investment Implication:
- Historically, small caps are a better investment choice in the 6 months following a Fed rate cut, as they tend to outperform large caps during this time. However, their performance becomes more uncertain over a 12-month horizon, indicating that investors might benefit from a more cautious approach in the longer term after the rate cut.
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