Judging by the recent move in the small-cap Russell 2000 Index (^RUT), the “phase one” trade deal with the U.S. and China is in the books and the U.S. economy could be poised to re-accelerate as a result in early 2020.
After staying in a tight trading range for most of the year — while the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 have surged — the Russell 2000 has broken out to a one-year high this week. The index comprises smaller market cap companies with operations primarily in the U.S.
For a good part of 2019, the index has been under wraps amid concerns about how small companies with less scale would navigate the Trump administration’s trade war.
The long-awaited breakout sends a signal to traders that U.S. companies are faring better than expected during the rocky trade conditions. Should a “phase one” trade deal be solidified before year end, that would only support the resilience in U.S. companies — at least seen through the prism of the Russell 2000.
Historically, a breakout of the Russell 2000 to a one year-high is often very bullish for the index.
From 1979 to 2019, the Russell 2000 has gained one month, three months, six months and one year following a breakout to a one-year high, according to researchers at SunDial Capital Research. The median one-year gain on the Russell 2000 after the breakout has been a cool 16.4%.
What’s the more, the Russell 2000 breakout to a one-year high historically means good things for the broader S&P 500. SunDial Capital Research notes the S&P 500’s median return one-year after a Russell 2000 breakout to a one-year high has tallied 13.7%.
Of course all of this could be smoke in mirrors if higher tariffs go into effect on Dec. 15. In the meantime, three cheers to hoping the rally is sustained.