The Russell 2000 erased all gains
Last week, the Russell 2000 index, which measures the performance of small U.S. stocks with small market capitalizations, closed at its lowest level since November 6, 2020. The index became the fastest U.S. stock index since the last U.S. presidential election, recording a four-month gain 45% growth. Other indexes such as the Dow, Nasdaq and S&P 500 saw about half the performance over the same time frame.
But those days are long gone, with the Russell 2000 down 10% year-to-date. The Nasdaq, which was recently affected by the rebalancing of individual weights, is still posting a solid 17% gain and the S&P 500 is up 7% year-to-date, roughly in line with its long-term historical average annual return.
Optimism about the economy’s recovery from a brief recession was fueled by Biden’s $1.9 trillion fiscal stimulus package approved at the start of his presidency. Data from JPMorgan released earlier this year showed that 22% of Russell 2000 members’ income comes from the domestic market, compared to 40% for the S&P 500.
The tightening cycle in interest rates has raised the cost of capital and that has underperformed companies with smaller market caps, which often have more volatile balance sheets and different funding needs than large firms. The same study by JPMorgan found that at the end of 2021, about 40% of the companies in the Russell 2000 were not profitable.
Facts for performance recovery
However, some are betting on the return of small-cap profitability. They have a rather paradoxical reason for this, and that is that market history suggests that the next driving force may be what the US economy continues to successfully push back – recession.
SoFi’s head of investment strategy, Liz Young, said small companies tend to do better when the unemployment rate rises. It’s a strange correlation to think about, but there are sound grounds to explain this tendency. The rise in unemployment tends to accelerate in the late stages of the business cycle because employment often “falls” before we get the “official” call for a recession.
Because once the dark clouds of recession dissipate and markets find their footing, small companies typically outperform large-caps. According to Young, data from Morningstar Direct shows that six months after the end of a recession, small companies typically have a total return of 30% or more, nearly double the 16.9% return seen by large companies over the same period.
The Russell 2000 index
, often abbreviated RUT or Russell 2000 Index, is one of the most important and well-known indices of the American stock market. It is a capitalization-weighted index that measures the performance of small American stock companies. The name “Russell 2000” refers to the fact that the index includes the 2,000 smallest companies out of thousands that are traded on American stock exchanges.
Some basic information about the Russell 2000 index:
Composition: The Russell 2000 index includes 2,000 small and medium-sized companies, which makes it a representative sample of this market segment. These companies are selected from American stock exchanges based on their market capitalization.
Capitalization-weighted: The Russell 2000 is a capitalization-weighted index, which means that larger companies have more weight in the index than smaller ones. This means that the performance of larger companies has a greater influence on the overall development of the index.
Diversification: The Russell 2000 index is well diversified, which means that it includes companies from different sectors of the economy. This helps reduce the risk associated with investing in small companies.
Benchmark: The Russell 2000 often serves as a benchmark for investors and fund managers who specialize in small companies. It is used to monitor the performance of investment fund portfolios and to compare investment results.
Points of interest: The Russell 2000 index is known to tend to show higher levels of volatility and growth than larger indexes such as the S&P 500. Smaller companies often have more potential for growth, but they are also riskier, which can lead to larger swings in the index’s value. .
Investment vehicles: There are various investment vehicles such as ETFs (Exchange-Traded Funds) and futures contracts that allow investors to trade the performance of the Russell 2000 Index.
The Russell 2000 Index plays an important role in the world of investments and helps investment professionals and investors monitor the development of small and medium-sized companies on the American market. It is an important tool for portfolio diversification and performance measurement in this market segment.