The stock market’s recent dramatic fluctuations are crushing smaller American businesses. This may be a warning sign for the economy.
The Russell 2000 (RUT) index, which includes firms such as Crocs (CROX), BJ’s Wholesale (BJ), and others with a market capitalization of over $3 billion, is currently trading more than 10% below its 52-week high. This indicates that it is in a state of “correction.”
The price of an iShares exchange-traded fund of microcap equities (IWC) (which are even smaller companies than those in the Russell 2000) has dropped nearly 15% from its high. As a result, it may be entering a bear market.
This is concerning because, unlike the Dow and S&P 500, most smaller US businesses rely more on the American economy (and US consumers) for revenue and profitability. They aren’t making as much money and profit from global marketplaces as they formerly were.
As a result, the struggles of smaller stocks may be a stronger barometer of the US financial environment than what’s going on with huge tech companies like Apple (AAPL), Microsoft (MSFT), and Google owner Alphabet (GOOGL), which have fared considerably better during the recent market downturn.
“Peel back one layer of the onion and there has been a more severe rotation in stocks beneath the surface,” said Liz Ann Sonders, Charles Schwab’s chief investment strategist.
Sonders pointed out that, outside of the biggest tech businesses, many of the smaller companies in the S&P 500 have experienced significant price declines in the past year. It’s just that there are enough “pockets of strength” among the index’s larger companies to obscure the overall market’s weakness.
This discrepancy has piqued the interest of several Wall Street strategists. In a recent article, David Wright, co-founder of Sierra Mutual Funds, stated that recently, significantly more equities on the NYSE and Nasdaq have been reaching new 52-week lows than highs.
“What this means is that the indexes are being held up by only a few huge stocks, while a rising number of equities are already in a bear market,” Wright explained.
The CNN Business Fear & Greed Index has abruptly dropped into nearly “extreme fear” territory after reaching levels of “extreme greed” just a month ago, thanks to a market slump in smaller stocks. Stocks that are falling in value have a bigger volume of shares than those that are rising in value.
Small businesses may not be able to afford to pay greater compensation to employees as easily as large corporations. As they endeavour to stay competitive with salaries, bonuses, and other compensation, profit margins (and overall earnings) may suffer.
