What's Driving Small-Cap Success For iShares Russell 2000 ETF (IWM) In November?

U.S. small-cap stocks have delivered an exceptional performance this November, with the iShares Russell 2000 ETF IWM climbing 8.5% and outpacing the SPDR S&P 500 ETF Trust SPY.

This year's rally for IWM is driven by supportive monetary policy, political developments, and economic resilience. The Federal Reserve's recent rate cuts, including a 25-basis-point reduction in November, have reduced borrowing costs, particularly benefiting small-cap companies that rely heavily on credit.

What To Know: Small-cap companies, which constitute the bulk of the Russell 2000 index, are typically more sensitive to borrowing costs than their larger counterparts.

Unlike large-cap companies, which often have diversified funding sources and international revenue streams, small-caps rely heavily on domestic lending to finance operations, expansion and innovation.

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Lower interest rates directly reduce borrowing costs, improving profit margins for small-cap firms. Additionally, cheaper credit can enable these businesses to invest more aggressively in growth initiatives, such as hiring, capital expenditures and research and development.

Rate cuts also typically encourage a rotation into riskier assets like small caps, as the lower yields on fixed-income securities push investors to seek higher returns in equities. This shift in investor sentiment is another factor behind the strong performance of IWM during periods of monetary easing.

What Else: Optimism surrounding the Republican sweep in the 2024 elections has further bolstered small caps, as investors anticipate regulatory rollbacks.

Economic fundamentals have added fuel to the rally. The U.S. economy remains strong, with steady GDP growth and a robust labor market supporting consumer confidence and domestic demand, key drivers for small-cap stocks.

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IWM Performance After Recent Elections

Historical data from Benzinga Pro suggests that the performance of small caps, including IWM, often reflects broader market sentiment driven by post-election policies, economic expectations and seasonal trends.

• November 2020 (Post-Biden Election): Following the election of Joe Biden, IWM experienced a sharp rally, increasing by 18.24% in November 2020. This surge was largely driven by investor optimism surrounding the COVID-19 vaccine and the possibility of new fiscal stimulus​.​
  
• November 2016 (Post-Trump Election): After Donald Trump won the election in November 2016, IWM rose by approximately 6.5%. This was fueled by expectations of pro-business policies, including tax cuts and deregulation​.
  
• November 2012 (Post-Obama Re-election): In November 2012, after President Obama was re-elected, IWM saw more modest growth, rising by about 1.5%. This reflected investor expectations of stability under Obama's second term​.
  
• November 2008 (Post-Obama's First Election): Following Barack Obama's first election, small-cap stocks faced challenges in the aftermath of the financial crisis. IWM declined by approximately 5% in November 2008 as the market struggled amid the global economic downturn​.

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