How the Russell 2000 Index moved last year
Investors watching this week’s S&P 500 plunge are processing the signal combination. Will the tariff threat push the economy into the recession, or is it a claim that this is merely a reduction from high-value technology companies that some analysts and investors claim?
There is another inventory index that flashes a clearer warning sign.
The Russell 2000 includes small businesses that are sensitive to the whims of the economy. These companies tend to implement thinner profit margins that could be more easily eroded during recessions, and when they get in trouble they have fewer levers to pull than large companies.
After a new high surge in November about optimism about the new Trump administration’s pro-business policy, the Russell 2000 fell by more than 16%, nearly double the S&P 500’s decline since peaking last month.
The Russell 2000 appears likely to be the first major index to return to the Bear market, defined as a decline of more than 20% from its recent highest since the stock market sale in 2022.
“If you want one clear signal that the market is more concerned about the recession than anything else, look at Russell,” said David Kelly, chief market strategist at JP Morgan Asset Management.
The ongoing policy pivot from the administration on tariffs has left investors uncertain about what will come and how the economy will be affected.
Even if tariffs are ultimately rewinded, uncertainty in the interim can encourage businesses to curb employment, pull back spending and slow the economy.
And there are indications that airlines are warning about declining air travel, retailers are warning about consumer spending, and cooks are warning about rising prices.
And it’s not just tariffs that investors face. Rapid cuts in the federal workforce and sudden halts on other government spending projects also risk slowing the economy.
“We are already seeing the impact of government spending cuts and we hope that continues,” said Kristina Hooper, Chief Global Market Strategist at Invesco.
Beyond Meat, a plant-based food company that is part of Russell 2000, warned in its latest financial report that tariffs and other countries’ measures could lead to higher prices. The company also warned that it could potentially lose customers overseas due to “anti-American sentiment.”
On Tuesday, the monthly survey of Independent Business Federation’s SME optimism fell for the second consecutive month, with the group’s uncertainty scale rising to one of the highest levels on record.
On Thursday, the S&P 500 was categorized into the revised area. This is defined as a decrease of more than 10% from the recent peak of the index.
However, the signal coming from the S&P 500 can be muddy due to its composition.
The ballooning size of the technology sector, led by companies like Apple and Nvidia, means that the index relies more on the ups and downs of these giants than any other giant.
The epic seven stocks are the names given to seven major high-tech companies that have been boosting the stock market in recent years, and currently accounts for around 30% of the S&P 500’s total valuation.
Analysts say the recent weeks of high-tech sales have probably expressed concerns about the broader market, but it could also be part of a shift in expectations for the potential benefits of artificial intelligence, or a step backward after a dramatic rise in valuations in recent years.
That preparation “prices for perfect prices” for the market, Kelly said. This means that every company needs to get the best possible outcome. “And this isn’t perfect,” he added.
The Russell 2000 Index is not overly concentrated on companies in one sector. Sprouts Farmers Market, the largest company in the index, accounts for just 0.5% of the index’s total valuation, while Apple, the largest stock in the S&P 500, weighs more than 7%, combined with the top 10 Russell 2000 shares.
Adjusting the S&P 500 to give equal weight to all inventory further shows the impact of the sale of the technology, reducing the index decline this year to 2.6% to over 6%.
Doing the same with the Russell 2000 only slightly changes this year’s drop of around 10.5%. The technology sector is not the largest in 2000 Russell 2000, with financial, industrial and healthcare stocks all making up the majority of the index.
What this means is that the signal from the Russell 2000 points more clearly to broader concerns beyond the overrated technical sector that had already been prepared for decline, analysts say.
The Russell 2000 Index is also more domestically focused. Approximately 30% of the S&P 500’s revenue comes from outside the US, twice the Russell 2000, and the international stock market is comfortably outpacing US stocks this year.
“I think what Russell is saying to us is that there are real concerns about the economy,” Hooper said.
