The downturn in small-cap stocks continues as the “Trump Bump” seen after last year’s U.S. election fades.
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Shares of smaller American companies remain under pressure, with the small-cap Russell 2000 index (RUT) down 5% from a 52-week high it reached on Nov. 25. At the same time, the benchmark S&P 500 index has gained 4% to start the year and closed at an all-time high on Jan. 22.
While Trump’s focus on strengthening the U.S. economy should be good for smaller companies, the asset class has encountered some hurdles in recent weeks. One of the main issues weighing on small-cap stocks, defined as securities with market capitalizations of less than $10 billion, is the potential for higher interest rates. Elevated rates increase borrowing costs and hit smaller companies hard.
Return of Inflation?
Trump’s tariff threats and the prospect of trade wars have raised concerns about a rise in inflation, which in turn could lead the U.S. Federal Reserve to hike interest rates. That would almost certainly rattle markets around the world, the Russell 2000 in particular.
While small caps were initially viewed as part of the Trump trade last November, that opinion has now faded, say analysts. The Russell 2000 index surged nearly 6% on the day after Trump’s electoral victory on Nov. 5. By late November, the index had hit its highest closing level in three years. But now, the Russell 2000 is flat since the U.S. election.
Small-cap stocks continue to underperform large caps by a wide margin. The S&P 500’s nearly 50% gain over the past two years is more than double the growth seen in the Russell 2000 index.
Is the iShares Russell 2000 ETF a Buy?
The iShares Russell 2000 ETF (IWM) that tracks the performance of the benchmark small-cap index has a consensus Moderate Buy rating among 1,956 Wall Street analysts. That rating is based on 1,259 Buy, 645 Hold, and 52 Sell recommendations issued in the last three months. The average IWM price target of $281.58 implies 23.78% upside from current levels.
