Small businesses in the US are being left behind as the stock market rises, a potential sign that investors are preparing for economic turbulence. The Russell 2000, which represents small-cap stocks, has fallen around 1% since the start of the year. Meanwhile, the S&P 500, a measure of the largest US companies, has risen 7% since the beginning of the year. Small businesses tend to make profits domestically and are more exposed to economic fluctuations than larger companies, indicating that investors are concerned about the economic outlook. Small-cap stocks have been struggling since the crisis began at regional US banks in March. The Russell 2000 has dropped 7% since 8 March.
Investors are setting their portfolios around what they believe will happen in the economy. Eric Kuby, Chief Investment Officer at North Star Investment Management, said that small-cap stocks are falling out of favour, which is another indication that investors are bracing for a recession. Since 1980, the Russell 2000 has been at its highest point, lagging behind the S&P 500 by an average of 4% in the six months before a recession. Some market players believe that the 500-basis-point rate hikes by the Fed in the past year are beginning to have an impact on the economy.
Small-cap US firms at the centre of the recent crisis, relying on loans from local banks, have been the hardest hit by bank volatility. Sixty-seven percent of small business owners in the US use small business or regional banks. While small and midsize banking stocks have been struggling in recent weeks, financial stocks have also been heavily represented in indices tracking small caps, contributing to the relative weakness compared to the S&P 500.
Some investors are optimistic about the future prospects of small-cap stocks, as they are more sensitive to economic fluctuations and tend to excel in the early days of a market recovery. The Russell 2000 posted an average total return of 44.8% in the six months after a trough, while the S&P 500 saw a rise of 32.2%. T. Rowe Price’s multi-asset group is overweight in US small caps in its multi-asset portfolio.