Russell 2000 looks set for a catch-up with large-cap indices
The Russell 2000 is a stock market index widely recognised as the leading benchmark for small-cap stocks in the US market. The small-cap index has faced a challenging year thus far, underperforming its peers such as the Dow Jones Industrial Average, S&P 500, and Nasdaq indices. At the time of writing on Jun 12, the Russell 2000 was down 4.1 per cent year-to-date, lagging behind its peers, which were up between 0.5 per cent and 1.4 per cent. Several key factors can be attributed to the sub-par performance of the small-cap index.
One of the primary drivers behind the Russell 2000's underperformance is the Federal Reserve's prolonged interest rate pause. Small-cap stocks are generally more sensitive to interest rate fluctuations as these companies typically carry more debt relative to their earnings than large-caps. This higher leverage means that changes in interest rates have a greater impact on their financial health, as high rates elevate the cost of servicing debt. In addition, small caps generally have weaker balance sheets and less access to capital markets, making it harder for them to absorb higher borrowing costs or secure favourable refinancing terms.
The Fed has kept interest rates steady between 4.25 per cent and 4.5 per cent since December 2024, and while markets expect two rate cuts later this year, in September and December, this cautious approach has put pressure on the Russell 2000.
Another key factor behind the Russell 2000's underperformance is the uncertain economic backdrop created by President Donald Trump's reciprocal tariff policies on the US' trading partners.
Small-cap companies are generally more domestically focused and have less pricing power, making them more vulnerable to disruptions in supply chains and increased input costs caused by tariffs. The uncertainty around trade policy has led to cautious consumer and business spending, dampening growth prospects and reducing investor risk appetite for small-caps.
However, from a technical standpoint, the Russell 2000 could be poised for a catch-up with the large-cap indices. The index is holding above the 12-day Simple Moving Average (SMA) following a bullish crossover with the 26-day SMA, a popular technical analysis strategy signalling bullish short-term momentum. The index also broke out above the neckline resistance of an inverse head and shoulders formation at 2,110 points on Jun 6, alongside a breakout of a downtrend resistance line. These are positive signals supporting a bullish recovery. Additionally, the Moving Average Convergence Divergence technical indicator made a fresh bullish crossover recently and is holding above the zero line, showing signs of renewed accelerating bullish momentum, which increases the likelihood of further gains.
In conclusion, the Russell 2000's lacklustre performance this year is the result of a confluence of factors, including a prolonged interest rate pause by the Fed and economic uncertainty from trade tensions. However, bullish technical signals for the index currently could see it play catch-up with the large-cap indices and rally towards the 2,320 points level.
The writer is research analyst at Phillip Securities Research
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
CNA
2 hours ago
- CNA
Bank Indonesia to hold rates steady at 5.50% on June 18
BENGALURU : Bank Indonesia will hold its interest rate steady on Wednesday, according to two-thirds of economists in a Reuters poll, although they remain divided on where borrowing costs might end the year. Indonesia's central bank will announce its decision just hours before the U.S. Federal Reserve is due to meet, with BI likely to prioritise the stability of the rupiah, which has risen nearly 4 per cent since early April. The Fed is expected to maintain rates until September amid concerns that trade tariffs imposed by U.S. President Donald Trump could fuel inflation in the United States. Of the 31 economists in a June 9-16 Reuters poll, 21 said they expected Bank Indonesia to keep its benchmark seven-day reverse repurchase rate unchanged at 5.50 per cent at the conclusion of its two-day meeting. The remaining 10 expected a 25 bps cut to 5.25 per cent, compared to just three economists in May's poll. "BI has limited space to cut, particularly if it wants to maintain some interest rate differential with the U.S., said Lavanya Venkateswaran, senior ASEAN economist at OCBC Bank. The bank cut interest rates by 25 bps to support the slowing economy last month. "Back-to-back rate cuts risk signalling a sense of urgency about the deterioration in the growth outlook, which BI will seek to avoid as it could weigh on broader sentiment and the currency," Venkateswaran added. Some economists warned tensions in the Middle East were fuelling global risk aversion, increasing the likelihood of capital outflows from emerging markets such as Indonesia and putting pressure on the rupiah. Half of respondents who provided a view beyond the upcoming meeting, 14 of 28, expected BI to cut rates to 5.25 per cent by the end of next quarter. Eight forecast rates at 5.00 per cent or below while six saw no change. The median forecast pointed to rates at 5.00 per cent by year-end, but with no majority view. "We still see room for BI to implement further policy rate cuts supported by weakening economic growth, subdued inflation, the potential for a Fed rate cut and Indonesia's relatively sound external sector," said Josua Pardede, chief economist at Permata Bank.
CNA
2 hours ago
- CNA
Explainer-What are bitcoin treasury strategies, the latest trend in the public markets?
Certain public companies, including one founded by President Donald Trump, have been going on a cryptocurrency buying spree, capitalizing on higher token prices and a softening regulatory environment to load up on the attention-grabbing investment. Sixty-one publicly-listed companies not primarily engaged in digital assets have adopted what are known as bitcoin treasury strategies, in which firms allocate a portion of their cash and reserves toward the world's largest cryptocurrency, according to a report from Standard Chartered. Here is what you need to know about the trend: WHY ARE COMPANIES DOING THIS? Many of those companies are seeking to replicate the success of Strategy, formerly known as MicroStrategy, a software company that began accumulating bitcoin in 2020 and now holds more than $63 billion worth. Its stock is up more than 3,000 per cent since 2020 as the price of bitcoin has skyrocketed, hitting fresh all-time highs above $110,000 this year. Strategy copycats have doubled their holdings in bitcoin in just the last two months to collectively hold just under 100,000 bitcoin, Standard Chartered said. Those firms include Trump Media & Technology Group, which raised $2.5 billion last month to invest in bitcoin. While investors can readily buy bitcoin directly or through an exchange-traded fund, investors typically cannot get the same kind of leverage a public company might be able to get through the convertible debt markets to buy bitcoin. Companies like Strategy trade at a premium to their bitcoin holdings because investors believe that those firms can utilize their access to credit markets to purchase even more bitcoin. Strategy and Trump Media & Technology Group did not immediately respond to requests for comment. WHICH COMPANIES ARE DOING THIS? Besides Strategy and Trump Media & Technology Group, a joint venture announced in April between SoftBank, stablecoin issuer Tether, and Cantor Fitzgerald - previously helmed by U.S. Commerce Secretary Howard Lutnick - caught investors' attention. The group is launching a $3.6-billion venture called Twenty One with the goal of acquiring bitcoin. SolarBank, a Toronto-based solar energy company, announced this month it would implement a bitcoin treasury strategy, saying it would expose the company "to a new category of tech-savvy investors." SolarBank has not disclosed how much bitcoin it plans to buy, only saying that the allocation strategy will be determined by management. "Traditionally, people invest in utilities as (an) afterthought. It's a very low return. It's a stable return," said SolarBank CEO Richard Lu. "So, how do we bridge the excitement of the new world and a classic industry? We feel that the crypto part of that is a bridge we need to cross." Upexi, a consumer products company, recently launched a treasury for Solana, another top cryptocurrency. "It is a great way for a company to really bring attention to itself and grow," said Brian Rudick, the firm's chief strategy officer. "If a company has a fiduciary duty to do what's best for shareholders, and if you're going to raise funds and invest it in the operating business, or if you can invest in funds and put it into a digital asset treasury that the market is rewarding companies that do so, you should do the latter," Rudick said. WHY NOW? The trend comes as Trump has sought to overhaul U.S. cryptocurrency policy after courting cash from the industry on the campaign trail. He signed an executive order in March to establish a strategic bitcoin reserve and has hosted industry leaders at the White House. Those moves have boosted the price of bitcoin and other cryptocurrencies. "It may be that some firms are trying to get political attention. This is clearly something President Trump has signaled his interest in," said Chester Spatt, a finance professor at Carnegie Mellon University. The stark shift in policy under Trump "is a serious tailwind for more and more institutions to get into the space," said Roshan Robert, CEO of crypto exchange OKX. "How institutions are looking at building out treasury applications is just a part of that broader picture." WHAT ARE THE RISKS? It is unclear if the various crypto treasury strategies will ultimately be successful, particularly if firms are buying in now as prices flirt with record highs in a sector that is no stranger to volatility. Charles Schwab, in a report last month, noted that if a company has significant crypto holdings that suddenly collapse in value, the firm could experience a liquidity crisis. Standard Chartered estimated that if bitcoin were to fall back below $90,000 it would put half of companies' bitcoin treasuries underwater. "As always, there will be some really, really big winners and some really big losers whenever there's a mania like this," said Ravi Doshi, the global co-head of markets at crypto platform FalconX.
Business Times
2 hours ago
- Business Times
The investing journey of a chief investment officer's son
MY YOUNGER son has begun his investment journey via a balanced portfolio – the majority in equities, 15 to 20 per cent in bonds and the balance in gold. However, our eldest son took a very different path. Instead of building a balanced portfolio from the start, he invested 100 per cent in stocks, especially US equities. His rationale was clear. The money, which we gifted for his 18th birthday, was a bonus and he did not need the cash for over 10 years. So, we looked at the historical performance of US equities over long periods of time. We found that it is very rare returns were negative over an extended time horizon. Meanwhile, he said he wouldn't be checking his portfolio daily. Therefore, short-term market volatility would not be a problem – to him at least. You can imagine my reservations about his approach. We will discuss the problem of geographic concentration later, but the 100 per cent allocation to equities made sense conceptually. My son's time horizon was long enough to warrant a very high allocation to equities. However, I thought it would be interesting to see how he dealt with the inevitable portfolio swings. Tracking the portfolio Given that he began his investment journey in mid-2023, things started out very well. He basically invested 50 per cent into an S&P 500 exchange-traded fund (ETF) and 50 per cent into a Nasdaq ETF. By the end of 2024, they were up around 40 and 50 per cent, respectively. So far, so good. However, in the second half of February this year, US equities started to weaken and fell about 10 per cent. It was at this point that I got a phone call to discuss 'whether he should be worried'. Of course, you can stand back and say he is still up by around 30 per cent, but the reality was that he had mentally banked the 40 to 50 per cent gains and emotionally he was experiencing material losses for the first time. Hence, the phone call. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Thankfully, he was not panicking. He wanted ideas on how he might tweak his portfolio to reduce its volatility. Volatility was not a problem when markets were going higher and higher, but once they reversed, the emotions kicked in. I hear this all the time with clients, regardless of their experience level. Managing volatility Now, the obvious place to diversify would be in bonds and gold. The challenge was that both had rallied during the equity market sell-off. As a house, we were still bullish on gold at that stage, but we believed that US government bond yields, then at 4.25 per cent, were not super attractive. Therefore, my son decided he would be patient about re-allocating his money and would switch into bonds once yields had risen slightly. The key here was to invest in a fund where the predominant exposure was high-quality investment-grade bonds, as sub-investment grade (also known as high-yield or junk) bonds would have a high correlation to equities even in relatively normal environments. Of course, the next call came after 'Liberation Day', when US President Donald Trump imposed import tariffs on all major economies and US stocks plummeted by over 10 per cent in two days. While my son had diversified somewhat into bonds, his equity exposure was still sizeable and still 100 per cent in US stocks. The US exceptionalism story was coming under a lot of scrutiny, and this worried him. Therefore, he decided he wanted to diversify into other stock markets. The 'good' news was that stocks around the world sold off at the same time. So, while he was selling an asset (US equities) that had cheapened, he was also buying an asset – in this case European equities – that had also gone on sale. Therefore, emotionally, he found this switch easier. Lessons learnt As I reflect on the different journeys our boys took – the younger one built a diversified portfolio to start with and averaged into it over time – I am trying to figure out who has got the better education from this process, which was always our number one objective of giving them some money to invest. The younger one learnt about portfolio construction from the start and does not check it often. However, this means he has no mental scars from the journey and therefore has probably learnt less about himself and his relationship with investing. The older one learnt that investing is emotional and that the best way to deal with this is to be diversified. They got to the same outcome – the benefits of a diversified portfolio – via very different routes. But my hunch is that my older boy has probably learnt more about what markets can do to your emotional well-being. I guess the real risk of letting them decide their own investment approach is that if they had put 100 per cent into Bitcoin, and it went to the moon, they may have learnt the exact opposite of what I had wanted. Thankfully, neither chose this route. (Steve Brice is global chief investment officer at Standard Chartered Bank's wealth solutions unit)
