The Russell 2000 Index, which tracks smaller companies, is sending a clear warning signal about the economy’s health. Small companies often have thinner profit margins, making them more vulnerable to economic downturns. The index has fallen more than 16 percent since its peak in November.
This sharp decline suggests that the Russell 2000 may become the first major stock index to enter a bear market since the sell-off in 2022. If you want one clear signal that the market is worried about recession more than anything else, then look at the Russell,” said David Kelly, chief market strategist at J.P. Morgan Asset Management. Policy shifts regarding tariffs have left investors uncertain about future economic conditions, adding to their anxieties.
The Russell 2000’s performance is a critical barometer for gauging broader economic trends. It encapsulates the struggles and prospects of smaller businesses that are more exposed to economic shifts. Its movement can provide valuable insight into potential future economic conditions.
Russell 2000 signals economic downturn
Despite the concerns, some experts highlight that small-cap stocks remain a beacon of stability. They note that small-cap stocks have been buoyed by strong domestic demand and flexibility in adapting to market shifts.
Investor confidence in small-cap stocks points to a positive outlook for the broader economy. This confidence is underpinned by solid earnings reports from many small-cap companies, which have outperformed expectations despite broader market challenges. While the Russell 2000 is only two percentage points away from entering bear market territory, Bank of America Research economists say it’s not pricing in a recession.
They still expect the economy to grow this year. “Historically in recessions the index has sold off close to 40% on average,” said Jill Carey Hall, head of U.S. small- and mid-cap strategy at Bank of America Research. “So it’s not pricing in greater than a 50% probability of a recession at this point.”
However, small businesses could face significant profit margin erosion with tariffs in place.
Bank of America estimates that the earnings hit from current levies on Canada, Mexico, and China could be three times larger for small caps than for large caps.
Image Credits: Photo by Marga Santoso on Unsplash
