The Russell 2000 index, a benchmark for small-cap stocks, is experiencing its strongest trading session in a month, propelled by renewed confidence in the U.S. economy’s resilience. Earlier this month, recession fears had rattled markets, but recent economic data has offered a glimmer of hope.
The iShares Russell 2000 ETF (IWM) surged 2.8% on Thursday afternoon, vying for its best single-day performance since July 16th when it rallied 3.4%. This outperformance compared to larger-cap indices underscores the Russell 2000’s heightened sensitivity to economic data and its potential for rapid growth.
The optimism surrounding the Russell 2000 was ignited by the release of strong economic data on Thursday. July 2024 retail sales exceeded expectations, while initial jobless claims for the previous week came in lower than anticipated, countering the recent recession fears.
Retail sales jumped 1% month-over-month in July, a significant rebound from the revised 0.2% decline in June. This surge surpassed the expected 0.3% gain and marked the most substantial increase since January 2023. The rise was primarily driven by a 3.6% increase in sales at motor vehicle and parts dealers, followed by a 1.6% rise in sales at electronics and appliance stores.
On the labor market front, initial jobless claims decreased from 234,000 to 227,000 for the week ending August 10th, defying market expectations of an increase to 235,000. This marks the second consecutive weekly decline since jobless claims reached a near one-year high of 250,000 in late July.
The positive economic indicators have led to a shift in trader sentiment regarding future Federal Reserve rate cuts. The probability of a 25-basis-point rate cut has now increased to 77%, up from 64% just a day earlier and 45% a week ago.
“The July retail sales data were consistent with our soft-landing economic outlook,” stated Aditya Bhave, an economist at Bank of America. Bhave highlighted that the retail sales control group, representing over a quarter of total personal consumption expenditures (PCE) and more than 80% of goods spending, has seen annualized increases of 6.8% and 4.4% over the past three and six months, respectively.
“With inflation cooling off, retail spending is still clearly running above trend. The decline in jobless claims reported today supports our view that a still-solid labor market is propping up consumer spending,” Bhave added.
David Morrison, senior market analyst at Trade Nation, commented, “It appears that the issues caused by the unwinding of the yen carry-trade, the frothiness of the tech sector, and U.S. recession fears have now dissipated. Investors are in a much better mood than they were 10 days ago, although a period of consolidation may be required to fully digest recent gains.”
Among the Russell 2000’s top performers on Thursday were AST SpaceMobile, Inc. (ASTS), Accuray Incorporated (ARAY), Gambling.com Group Limited (GAMB), Perpetua Resources Corp. (PPTA), and Telos Corporation (TLS). Conversely, the top losers included Terran Orbital Corporation (LLAP), SIGA Technologies, Inc. (SIGA), Spire Global, Inc. (SPIR), B. Riley Financial, Inc. (RILY), and Titan Machinery Inc. (TITN).
The recent surge in the Russell 2000 suggests a shift in investor sentiment, with renewed confidence in the U.S. economy and its potential for continued growth. However, it remains to be seen if this positive trend will sustain, as economic uncertainties and market volatility persist.
