Does The Russell 2000 To S&P 500 Ratio Suggest A Coming Recession?

The S&P 500 traded above 3,000 for the first time in history on Wednesday after Fed Chairman Jerome Powell signaled a willingness to sustain the current economic expansion by reducing the Federal Funds rate. Equity markets were jubilant with the Dow Jones and Nasdaq 100 tagging their own record highs alongside the S&P 500. Interestingly, the small-cap Russell 2000 remains well beneath its own all-time high and its ratio to the S&P 500 slipped to the lowest level since April 2008. In the year following the S&P 500 dropped over 43%, but does a return to these levels suggest the S&P 500 is due for similar declines – or possible recession?


(Click on image to enlarge)

S&P 500 and Russell 2000 ratio

S&P 500 Price Chart Overlaid with Russell 2000 in Red. Russell/SPX Ratio in Blue.

Simply put, it depends. Like with most other things in global financial markets, conflicting themes and the different weights afforded to them make it nearly impossible to isolate a single catalyst. That said, there are clearly some worrisome undercurrents at play, particularly given market conditions that should bolster the ratio - in theory. Arguably the headline factor, small caps are more isolated from international trade than their larger and more international counterparts.

Around the onset of economic hostilities in 2018, many market participants touted the source of earnings for each index as an important discrepancy that could potentially translate to outsized returns for the Russell. Since 2014, the average percentage of sales derived from foreign countries made up roughly 43% of total sales reported by companies listed on the S&P 500 according to S&P Global. The dependence on foreign sales renders the S&P 500 more vulnerable to trade wars than the Russell 2000, which receives around 20% of sales from overseas. Despite the difference in revenue origination, the Russell has not outperformed the S&P 500 since late September.

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