Is a Market Recovery in Sight?

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The stock market roared back to life on Thursday after the Federal Reserve laid out an ideal scenario for investors – falling inflation, rate cuts on the horizon, and an economy heading for a soft landing.

The Dow jumped nearly 500 points to top 37,000 for the first time ever, while the S&P 500 closed in on its record high from early 2022. And the interest rate-sensitive Russell 2000 small cap index outperformed larger benchmarks by over 50% as investors pivoted towards beaten-down areas of the market.

According to Noble Capital Markets’ CEO Nico Pronk, “this may be a market recovery happening in front of our eyes. We are seeing all the signs here.” Fed Chair Jerome Powell’s highly anticipated comments on Wednesday took the lid off the market’s concerns over surging rates upending the economy. The central bank’s updated forecasts now call for no more rate hikes in 2023, along with three 0.25% cuts in 2024.

That’s welcomed news for rate-sensitive sectors like real estate and regional banks that have been hammered for most of 2022 on fears of sustained higher borrowing costs. Regional banks popped nearly 5% on Thursday, extending a rally that has seen the group gain over 20% in the past month alone as the path towards rate cuts grows clearer.

The tech-heavy Nasdaq also continues to rebound, now up over 10% since mid-October, while the small cap Russell 2000 has exploded more than 20% over the same stretch. The index had given up all its pandemic-era gains earlier in 2022 amid rate hike jitters, but with a soft landing now in sight, it’s leading the way higher once again.

Pronk believes markets are moving towards a positive direction and showing strong signs of recovery.

Economic Experts Forecasted Markets Breakout

During an economic outlook panel at NobleCon19, experts agreed on a possible resurgence of the markets, particularly in the small-cap space. The consensus was that small-cap investments tend to outperform larger companies during economic recoveries due to their greater potential for growth. The panel expressed optimism for how the Russell 2000 index may surprise investors moving into 2024.

With inflation and rates now clearly on downward trajectories per the Fed, the stars have aligned for financials to break out as risks meaningfully recede. Traders and investors are taking notice, investing money back into the space to play long-awaited catchup to index gains.

Russell 2000 Small Caps Lead the Charge

Another standout area has been small caps, with the domestically-focused Russell 2000 now charging ahead of larger benchmarks since the October lows.

The Fed’s resolute commitment to tamping down inflation has brought U.S. rate hike expectations back in sync with global peers. That’s helped dissipate a major headwind for small caps tied closely to domestic growth.

Add in falling recession odds, and the stage is set for investors to once again embrace the higher growth, higher beta segment of the U.S. market to drive gains from here. The Russell 2000 now trades just 6% away from retaking all-time highs emblematic of the pre-rate hiking frenzy.

Its outsized advance against the more moderate S&P and Dow gains points to conviction building around more speculative areas poised to benefit most from easing financial conditions. Traders now see the elusive soft landing materializing in 2023, with markets firing ahead on hopes a still-resilient economy can avoid buckling under the Fed’s inflation fight.

After a Fed-dominated year where good news was largely shunned amid policy uncertainty, bulls once again have reasons for optimism. The light at the end of the rate hiking tunnel has markets gearing up for a potentially substantial move higher to round out 2023.


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