Almanac Trader — Small-Cap Labor Day Rally Fueled By Fed Rate Cut…

In the chart, 46 years of daily data for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, large-cap companies are outperforming small-cap companies; when the graph is rising, smaller companies are moving up faster than their larger brethren. The most prominent period of outperformance generally begins in mid-December and lasts until late-February or early March with an impressive surge in January. This period of outperformance by small-caps is known as the “January Effect” in the annual Stock Trader’s Almanac.

In recent years, another sizable move is evident around Labor Day. One possible explanation for this move is individual investors begin to return to work after summertime vacations and are searching for “bargain” stocks. In a typical year, small-caps would have been lagging and could represent an opportunity relative to other large-cap possibilities. Even after the last two weeks of gains, as of Monday’s close, (August 18, 2025), Russell 2000 was up just 2.9% compared to Russell 1000 being up 9.5% year-to-date. Lagging small-caps and September Fed interest rate cut expectations could be the ideal setup for a repeat of this pattern this year. However, the small-cap advantage does historically wane around mid-September.