For years, investors have been looking for a big breakout in small-cap stocks. The stars may be aligning for one. The iShares Russell 2000 ETF (IWM) , which tracks the small-cap benchmark, jumped nearly 1% premarket Thursday. IWM has also had a strong week, up 2.6% — outperforming the S & P 500 . Driving the big gains in small caps this week is increased hope that the Federal Reserve will soon start cutting its benchmark lending rate after recent data showed weakness in the economy. The CME Group’s FedWatch tool shows traders are pricing in a 93% chance of a Fed rate cut in September. Smaller companies benefit more than larger ones from easier monetary policy because they rely more on borrowing. If the Fed cuts rates, that lowers the cost of capital for smaller outfits, making it cheaper for these companies to take out loans to expand their businesses. Investors are also starting to find attractive opportunities in small caps. Wolfe Research strategist Rob Ginsberg noted that investors “wasted no time stepping in and buying the dip” in the Russell 2000 after Friday’s broad market sell-off. Ginsberg added that the pullback led to more than 50% of Russell 2000 constituents hitting a one-month low, “a short-term indicator that is often met with buying.” “The signal more often than not marks a near term bottom and is met with buying,” he added. To be sure, investors have been burned many times in recent years by small caps. While the S & P 500 has reached new heights this year, the Russell 2000 is still 8% below its November record. .SPX .RUT YTD mountain SPX vs Russell 2000 year to date The Russell has also lagged the S & P 500 for five straight years. The large-cap S & P has also outperformed its small-cap counterpart in 12 of the past 20 years. “The big names have really led the day, and it’s gone on for so long you almost think it will go on forever,” Mellody Hobson, co-CEO of Ariel Investments, said in an interview that aired Thursday on ” Squawk Box .” However, Hobson noted that a reversion has to take place at some point. “Trees do not grow to the sky,” she said.
