Markets were relieved over a stopgap bill that allows the U.S. government to continue functioning for 45 days. But they grew more anxious over ever-increasing Treasury yields — both the 2-year and 10-year yield increased about 0.1 percentage points. Markets, as a result, teetered between the green and the red.
The S&P 500 was unchanged, the perfect symbol of dancing on that knife’s edge. The Dow Jones Industrial Average declined 0.22%, but the Nasdaq Composite advanced 0.67% for its fourth consecutive day.
But it’s the Russell 2000 index to which investors should pay attention. The index fell 1.6% Monday, dragging down its year-to-date performance to negative 0.2%. In other words, the Russell 2000 turned negative for the first time in 2023.
Why does that matter to investors?
A quick background on the index. It comprises 2,000 small companies — the average market capitalization of a firm on the Russell 2000 is $2.98 billion, as of Aug. 31. (By contrast, a firm must have a market capitalization of at least $14.5 billion to be added to the S&P 500.)
Compared with the S&P’s year-to-date increase of 11.69%, the Russell 2000’s loss underscores how gains have been concentrated in mega-caps this year.
More significantly, investors think the Russell 2000 more accurately reflects the state of the U.S. economy. Smaller firms are more exposed to macroeconomic conditions. They don’t have the humongous cash reserves of Apple to help them sit out tumultuous times, for instance, or have pricing power to increase margins even as inflation bites.
The implication’s that the Russell 2000’s year-to-date loss portends further declines for stocks later in the year, as economic conditions catch up with bigger firms.
But Paul Hickey, co-founder of Bespoke Investment Group, doesn’t think that’s necessarily the case. Financials comprise much of the index, Hickey said, which makes the Russell 2000 more sensitive toward higher interest rates.
“So if you put all those factors together, I wouldn’t say that the Russell 2000 is a canary in the coal mine,” said Hickey.
A canary the Russell 2000 might not be, but a cautionary tale it definitely is.
— CNBC’s Hakyung Kim contributed to this report
