Russell 2000 Index Weakens As Bank Components Take It Down

The Russell 2000, considered by some to be a bellweather for the economy, is showing the least amount of strength among the major stock market indexes right now. The index, designed to track the movement of small capitalization stocks has not been keeping up with the S&P 500 or the NASDAQ
NDAQ
-100.

The effects of the Fed’s moves to higher interest rates is having a greater impact on this group of stocks and that hurts the financial sector — the group amounts to 16% of the total number within the Russell 2000.

Here’s the daily price chart for the iShares Russell 2000 ETF a closely followed benchmark for the small caps index:

The high of $198 was reached during the early February rally that was present for all of the stock market indexes. The current price of $177 represents a 10.6% loss in about 2 1/2 months’ time for those who jumped in to join the early February excitement with buy orders.

Now, compare that to the daily price chart for the SPDR Standard and Poor’s 500 ETF:

The early February high of $415 is reached again in mid-April after a March dip to $380. Note the contrast between this chart and that of the Russell 2000 ETF. It’s clear that small capitalization stocks are underperforming lately.

Here’s the Russell 2000 ETF viewed in S&P 500 ETF terms:

In other words, the small caps aren’t keeping up with the big stocks that make up the world’s most widely followed index, the S&P 500.

A major part of the problem for the Russell 2000 is the significant chunk of bank stocks that make up at least 16% of the index.

We’re not supposed to refer to it as a “banking crisis,” according to economist Mohammed El-Erian, so let’s just say the seriousness of the difficulties facing that sector is considered by investors to be enough for them to be finding the sell button in a vigorous fashion.

Here are a few examples of the banks dragging down the Russell 2000:

The biggest bank stock in the index is First Financial Financial Bankshares, based in Abilene, Texas, (NASDAQ: FFIN) with a market capitalization of $4.33 billion. Here’s the daily price chart:

The regional banking stock traded at $45 in October, 2022 and now goes for $29.41, losing 34.6% in value from last year’s autumnal high. Note that both the 50-day moving average (the blue line) and the 200-day moving average (the red line) are steadily trending downward.

The second biggest bank stock in the index is SouthState Corporation, headquartered in Columbia, South Carolina, has a market capitalization of $5.20 billion. Take a look at the daily price chart:

It’s another regional banking stock that’s been down trending since at least last fall. The November, 2022 high was $91 and the current price is $68 for a 6-month loss of 25% from the peak to the present.

Until this sector gets its feet again investors can expect the Russell 2000 to continue to underperform.