Cooling inflation data outlined in October's CPI report has given rise to a rally across large and small-cap stocks, as the Russell 2000 (^RUT) is outperforming the S&P 500 (^GSPC) this week.

CFRA Research Chief Investment Strategist Sam Stovall joins Yahoo Finance to talk about the stock action seen across indices and how investors should be feeling at the moment.

"If you go back to the early 1980s when the Russell 2000 first came out, basically looking at all bull markets, they were accompanied by a decline in interest rates," Stovall says on small-cap stocks. "From a valuations perspective, they look very attractive, and I think investors are chomping at the bit, waiting for the gate to open."

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

This post was written by Luke Carberry Mogan.

Video Transcript

AKIKO FUJITA: Well, this week softer than expected.

CPI data sent stocks rallying.

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The data is encouraging to investors ahead of the Fed meeting next month and their confidence is showing in different assets.

Specifically small cap stocks may be having their day in the sun set to outpace the S&P 500.

To tell us more, Sam Stovall, CFRA Research chief investment strategist joins us today.

Sam, before we get into the small caps, I want to get your view on the market moves that we saw this week, a huge rally coming on the back of a softer than expected CPI print.

How much of that was justified or you think the market's, kind of, getting ahead of itself a little?

SAM STOVALL: Well, Akiko, I think it is justified, but you always have to wonder whether it's simply a short covering rally.

I think what has kept down the small caps in this early part of this bull market has been the continued hawkish actions and rhetoric by the Fed.

Because if you go back to the early 1980s when the Russell 2000 first came out, basically looking at all bull markets, they were accompanied by a decline in interest rates except for the 1988 bull market.

That one we still saw higher interest rates.

But this time around, certainly very much on the up scale for interest rate hikes.

So I think that's been holding back the small caps.

But from a valuations perspective, they look very attractive.

And I think investors are chomping at the bit waiting for the gate to open.

RACHELLE AKUFFO: So Sam, as you look within smaller and mid caps then, which ones have the most room to run?

SAM STOVALL: Hey, Rachelle.

Well, those areas that have done very well that you can get, sort of, an idea of which ones are favored by the market based on how well they've done in this past week.