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The iShares Russell 2000 (IWM) ETF could benefit as the Federal Reserve changed its tune on interest rates. The fund, which tracks the small and medium enterprises, has staged a strong comeback as it jumped to a high of $193.33 on Thursday. It has risen by more than 20% from its lowest point this year.
Small cap stocks in the spotlight
Many small cap stocks have gone through a major challenge in the past two years interest rates remained at their highest point in over 20 years. While all companies have been impacted by high rates, smaller firms have been more vulnerable.
In most cases, many small companies tend to be affected substantially by higher interest rates since they don’t have a lot of money in their balance sheet. In comparison, giant companies like Apple, Berkshire Hathaway, and Microsoft generate billions of dollars by simply investing their cash into short-term government bonds.
This situation explains why the Russell 2000 index has severely underperformed other big American indices like the Dow Jones, Nasdaq 100, and S&P 500 indices in the past two years.
Therefore, the change of tune by the Federal Reserve could have a positive impact on these small-cap stocks. In its final decision of the year, the bank left interest rates unchanged for the third straight meeting.
Most importantly, the bank hinted that rate hikes would start in 2024. Therefore, most analysts are now pricing in at least three rate cuts as inflation falls. In a note, analysts at Goldman Sachs estimated that cuts would start in March next year.
JP Morgan, on the other hand, expects the initial rate cut to come in June. It expects either three or four rate cuts during the year.
Therefore, fundamentally, there is a possibility that the iShares Russell 2000 ETF will continue rising as investors anticipate these rate cuts.
IWM ETF technical analysis
The weekly chart shows that the iShares Russell 2000 ETF stock price has made a strong recovery in the past few weeks. It has moved above the 50-week 100-week moving averages. The Relative Strength Index (RSI) has drifted upwards and has moved above 60.
In addition, the Stochastic Oscillator has moved to the overbought level. Therefore, the outlook for the IWM ETF is bullish if bulls manage to move above the key resistance at $197.50. If this happens, the next price to watch will be last year’s high of $237.71, which is about 20% above the current level.
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