Small-cap stocks inched closer toward a correction on Wednesday, marking the latest speculative trade to flash warning signs. The Russell 2000 slid nearly 1% in Wednesday’s trading, underlining its weak start to the year. With that, the index widely seen as a bellwether for U.S. small-cap names approached correction territory, which is when an average falls 10% from a recent high. .RUT 6M mountain Russell 2000, 6-months This move marks a turn for the Russell 2000, which posted a 2024 gain of 10%. A chunk of last year’s advance stemmed from the victory of President-elect Donald Trump, whose preference for less regulation is seen as a benefit for smaller companies. This group also got a boost as the Federal Reserve lowered interest rates. Tom Lee’s positive outlook bolstered this cohort. Shortly after Trump’s election, the head of research at Fundstrat told CNBC he expected small caps to outperform by 100% over the next several years. The Russell 2000 ran up nearly 11% in November, which marked its best month of 2024. However, the small-cap index lost more than 8% in December as traders focused on rates and the economy. Ultimately, the Russell 2000 sharply underperformed the S & P 500 in 2024, which surged 23% in the period. “Capping off a year where rates/the Fed were a key driver of Russell 2000 returns, concerns around small caps’ rate sensitivity/refi risk have reemerged in recent months amid a more hawkish FOMC,” said Jill Carey Hall, head of U.S. small and midcap strategy at Bank of America, in a recent note to clients. Hall was referencing commentary from members of the Federal Open Market Committee, which sets U.S. monetary policy, that’s been less optimistic on interest rate cuts going forward. Fed funds futures are pricing in more than a 95% likelihood that the central bank keeps interest rates unchanged at its meeting later this month, according to CME’s FedWatch tool. On top of that, she said there have been more hopes than there has been evidence of a projected recovery in earnings per share for small caps. She pointed to midcap stocks as a better positioned segment for 2025, given that this group has seen better earnings revisions and has less risk tied to politics and rates. Small caps are one of a handful of more speculative corners of the market that have struggled in recent days. Quantum stocks plunged in Wednesday’s session, while bitcoin dropped to about $94,000.
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