Here’s what a key index is saying about the economy

As the economy experiences turbulence due to President Trump’s foreign trade policy and the stock market reacts with volatility, a lesser-known index is signaling potential trouble ahead. The Russell 2000, which tracks small-company stocks, has seen a significant decline of over 18% since its peak in November following the election of President Trump.

Initially, the index rose on hopes of a more business-friendly environment under the new administration. However, these hopes have been dashed by an escalating trade war initiated by tariffs imposed against key trading partners. As a result, the Russell 2000 is approaching bear market territory, with a drop of 20% or more from its recent high.

The index is seen as a barometer for small U.S. stocks across various sectors, making it more sensitive to economic changes compared to larger indices like the S&P 500. Smaller companies within the Russell 2000 are more susceptible to market shocks due to thinner margins and higher borrowing costs.

Some notable companies within the Russell 2000 include FTAI Aviation, Sprouts Farmers Market, Beyond Meat, and Duolingo. With tariffs threatening price hikes across industries, small and mid-size businesses are now focused on survival rather than growth.

While the Russell 2000 is close to bear market territory, economists at Bank of America Research do not believe it signals an impending recession. They still anticipate economic growth this year, despite potential profit losses for small businesses. However, the impact of current tariffs on countries like Canada, Mexico, and China could result in three times larger earnings hit for small caps compared to large caps.

In conclusion, while the Russell 2000 may be facing challenges, it is not indicative of a recession. Small businesses are likely to experience profit losses due to tariffs and market uncertainties. It is crucial for investors and stakeholders to monitor the situation closely and adapt strategies accordingly.