Investors watching the S&P 500’s plunge this week are processing a mix of signals. Will the threat of tariffs push the economy into a recession or is this simply a retrenchment from the highly valued technology companies that some analysts and investors argued were due for a pullback?
There is a different stock index that is flashing a clearer warning sign.
The Russell 2000 includes smaller companies that are more sensitive to the whims of the economy. These companies tend to run thinner profit margins that can be more easily eroded in a downturn, and they have fewer levers to pull than big companies if they do get into trouble.
After surging to a new high in November on optimism about the new Trump administration’s pro-business policies, the Russell 2000 has tumbled more than 18 percent, roughly double the decline of the S&P 500 since it hit a peak last month.
The Russell 2000 now appears likely to become the first major index to slip back into a bear market, defined as a drop of 20 percent or more from its recent high, since the stock market sell-off in 2022.
“If you want one clear signal that the market is worried about recession more than anything else, then look at the Russell,” said David Kelly, chief market strategist at J.P. Morgan Asset Management.
Continual policy pivots from the administration on tariffs have left investors uncertain about what is to come and how the economy may be affected.