Image source: BigCharts
Small caps tumbled Thursday to their lowest level in over a year, with the Russell 2000 Index falling 2.3% to close at 1,931.29.
Since setting an all time high on November 8, 2020, the bellwether small cap index has plunged 20.9%, defining its first bear market move since March 2020.
Eyes on the Fed
Federal Reserve Chair Jerome Powell, in his press conference on Wednesday following the FOMC meeting, said that inflation has gotten “slightly worse” since the Fed last met in December.
Powell said that raising the Fed’s benchmark rate will help prevent high prices from becoming commonplace and signaled that a series of interest rate hikes would begin in March.
The Fed Chair asserted that the Fed would manage the process in a careful way that would minimize disruptions economic growth or the unemployment rate.
“I think there is quite a bit of room to raise interest rates without threatening the labor market,” Powell said.
“The best thing we can do to support continued labor market gains is to promote a long expansion, and that will require price stability.”
Harbinger of doom?
While stocks across the market capitalization spectrum have traded lower with rising interest rates and inflation looming, small caps have been pacing the decline.
Investors have been shedding riskier holdings, ranging from crypto, tech stocks and small caps that don't have as reliable a record of earnings and growth as their larger cap brethren.
31% of Russell 2000 companies were not profitable as of year-end 2021, according to a report by the investment bank Jefferies as cited in The Wall Street Journal this week.
The last time the Russell 2000 entered bear market territory in 2020, the decline in small caps presaged the fall of the major large cap indexes just a few days later, as the S&P 500 and Nasdaq Composite all fell into bear market territory.
From its November 2021 peak, the Nasdaq has dropped 17%, while the S&P 500 is down 10% from its all-time set earlier this month.
With the Russell 2000 crossing the bear threshold, investors should be mindful of the other indexes maintaining their correlation.
Source: Equities News