BI PRIME: One area of the US stock market hung held up strong compared to broader indexes during Thursday’s selloff, and it could be a haven going forward.
Looking for a place to hide as the stock market slides? The Russell 2000 might be the index for you.
The gauge of small-cap companies fell roughly half as much as its broader-market counterparts on Thursday following President Donald Trump’s confirmation he’ll seek tariffs on steel and aluminum— an action that could be signed by Trump as early as next week.
The reason is simple: companies in the Russell 2000 are less reliant on overseas markets, deriving only 20% of their sales from foreign sources, according to S&P Dow Jones Indices data. That makes them far less beholden than firms in the S&P 500, which get roughly 43% of their revenue from overseas.
As this chart shows, although the Russell 2000 took a beating of its own on Thursday, even its deepest intraday loss paled in comparison to what was unfolding in the S&P 500 at the same time.
The Russell 2000 has been resilient amid broad selling, relative to the more internationally exposed S&P 500. Business Insider/Andy Kiersz, data from Bloomberg
Considering Trump’s proposed tariffs could lead to retaliation from foreign nations and possibly an all-out trade war, the pain felt in US stocks on Thursday could easily extend far beyond a single day.
After all, major indexes like the S&P 500 have been carried for much of the nine-year bull market by their largest companies — the ones that generally have more to lose overseas. If concerns persist, it’s possible traders will continue to flee large-cap indexes, dragging one of the equity rally’s key drivers along with them.
It doesn’t necessarily mean small stocks won’t feel some pain. As Business Insider’s Josh Barro points out Trump’s new tariffs will actually hurt the very manufacturing industry Trump thinks he’s protecting. Tariffs will raise costs for producers, which will discourage investment and growth.
And that, in turn, will reduce both corporate profits and job creation — something that’s bad for everyone.
Still, it’s likely investors will be seeking shelter as everything shakes out. And to the degree they want to stay invested in US stocks, they could do a whole lot worse than the small-cap sector.
