Chart Of The Day: Russell 2000 To Continue Sinking Into Bear Market Territory

 | Feb 08, 2022 09:29AM ET

Small cap stocks, along with their primary index the Russell 2000, have had a hard time of it, ever since the COVID pandemic began in 2020. First, mega cap growth stocks became the rage, then, just when value shares—which trade on the Russell 2000 Index—looked to be benefiting from the reflation trade late last year, the US Federal Reserve pivoted on its path to interest rate hikes, signaling the first increases would come in 2022, and small caps got pummeled again.

Of the four main US indices, the Dow Jones, S&P 500, NASDAQ and Russell 2000, only the small cap index has slipped into bear market territory. That occurred when the benchmark fell 20.94% between its Nov. 8 record close and its closing price on Jan. 27.

As a frame of reference, the second worst-performer has been the NASDAQ 100. The tech-heavy index fell 15.1% from its Jan. 4 record to its Jan. 27 close; the SPX dropped just 9.8% over a similar timeframe, between its Jan. 3 record and Jan. 27 low, not even entering correction territory, which starts at -10.00%. Finally, by the above measures, the mega cap Dow has outperformed, retreating just 7.24% between its Jan. 4 record and Jan. 27 close.

The Russell 2000 is lagging for a variety of reasons: small caps are sensitive to rising labor costs and escalating inflation. They also lack the accounting flexibility available to the multinational mega caps listed on the Dow Jones. Plus their position as domestic companies lacking in global exposure makes them more vulnerable to the economic cycle.

So, is JPMorgan Chase strategist Marko Kolanovic's recent positive call on beaten down small caps, which he considers a buy, correct?

We don't think so. First, the 20% drop from its record which has planted the small cap index into a bear market, is likely to sour sentiment on the Russell 2000. In addition, the index's technicals are pointing to an ongoing downturn.