Russell 2000 Smallcap Index Faces Tough Challenges in 2022

The U.S. Small Cap 2000, or the Russell 2000, has had a tough time scrambling to get higher over the past year. According to FTSE Russell, the Russell 2000 Index is designed to provide a comprehensive, unbiased barometer of the small cap segment of the US equity markets. It is a subset of the Russell 3000, that includes approximately 2000 of the smallest capitalization securities. Why do investors need to track these small caps? These have been exactly the small companies that suffered the most during the pandemic despite repeated government attempts to support them fiscally and financially.

It is important to remember that modestly capitalized stocks tend to have higher beta, which measures a stock’s volatility. Therefore, it is best to actively manage these stocks. However, when in an index of 2000 stocks, the volatility tends to be consistent with that of overall markets.

As the larger cap S&P 500 and NASDAQ 100 were climbing higher with occasional retreats, the smaller cap stock index was trading sideways. On January 7th it recorded a low of 2059.33. Ever since, the index traded in a range between the former number and 2360 for nearly the next 10 months before breaking above the channel on November 3rd. The index made its all-time high on November 8th at 2458.85, however failed to sustain its achievement and pulled back into the former channel. The candlestick at those high on the daily timeframe was a shooting star, an indication of a possible reversal.

Looking forward, 2022 will be most likely a difficult year for the small caps, since omicron Covid-19 virus proved to be highly contagious which means more periods of public places closures are likely to occur. At the same time, gradual tightening of Fed’s monetary policy means higher cost of borrowing, which will constitute a serious challenge for the market segment.