What is the Russell 2000 index?
The “Russell 2000” is a stock market index that measures the performance of approximately 2,000 small-cap companies in the United States. It is a subset of the broader Russell 3000 index, which encompasses the 3,000 largest publicly traded US stocks.
Small-cap companies are considered to have a smaller market capitalisation compared to large-cap companies. Market capitalisation, or “market cap,” is the total value of a company's outstanding shares of stock, and it is calculated by multiplying the stock's price by the number of outstanding shares.
The Russell 2000 is a broad and inclusive index that is represented by a diverse set of companies covering a wide range of sectors. This includes financial services, industrial and manufacturing, information technology, healthcare, retail, energy, real estate, communications, and more.
The Russell 2000 index is maintained by FTSE Russell, a global index provider, and is widely used by traders, investors, and other financial professionals as a benchmark for small-cap stocks' performance. It is often used to track the overall health and trends in the small-cap segment of the US stock market. The index is reconstituted annually to ensure it remains representative of the current small-cap market.
What affects the price of the Russell 2000 index?
The Russell 2000 index's price is influenced by several key market factors that impact the overall sentiment and performance of the underlying small-cap stocks. These include:
- Economic indicators: Economic data, such as Gross Domestic Product (GDP) growth, employment numbers, inflation rates, and consumer confidence, can have a considerable influence on the performance of small-cap companies and, in turn, the Russell 2000 index. Strong economic indicators tend to be favourable for small-cap stocks, as they indicate a healthy business environment.
- Interest rates: Variations in interest rates that central banks set can affect the cost of borrowing for small businesses and have an impact on their profitability. Lower interest rates support economic growth and can benefit small-cap companies, while higher rates may increase borrowing costs and reduce corporate profitability.
- Corporate earnings: The financial performance of individual small-cap companies directly affects their stock prices and, subsequently, the Russell 2000 index. Positive earnings reports and growth projections can drive stock prices higher, while disappointing earnings may lead to declines.
- Market sentiment: Investor sentiment and market psychology play a significant role in determining small-cap stock prices. Positive news, optimism about economic prospects, and favourable sentiment towards small-cap stocks can drive the index higher, while negative sentiment can lead to declines.
- Sector-specific factors: Performance and trends within specific sectors can impact the overall index. For example, if a particular sector experiences rapid growth, it can lift the overall index if that sector is well-represented in the Russell 2000.
- Geopolitical events: Political and geopolitical events, such as elections, trade disputes, or geopolitical tensions, can create uncertainty in the market and affect small-cap stocks' performance.
- Market liquidity: The availability of capital and liquidity in the financial markets can impact small-cap stocks' ability to attract investment and influence the Russell 2000's price.
- Currency fluctuations: For companies with international operations or trade exposure, currency fluctuations can have a significant impact on revenues and profitability, which can subsequently affect their stock prices and the index.
- Market regulation: Changes in financial regulations or policies can impact the operations and prospects of small-cap companies, influencing their stock prices and the index.
- Mergers and acquisitions: News of mergers, acquisitions, or significant partnerships involving small-cap companies can drive stock prices.
- New listings and initial public offerings (IPOs): Price changes and trading possibilities can result from new IPOs, small-cap company listings, and the yearly revision of the current list of Russell 200 listed enterprises.
- Major market index trends: The performance of other major market indices, such as the S&P 500 and the Dow Jones Industrial Average, can influence overall market sentiment and impact the Russell 2000 index.
What to watch out for when trading the Russell 2000 index?
When trading the Russell 2000 index, it is essential to stay informed about key announcements and market news events that can significantly impact small-cap stocks and the overall performance of the index. Here are some of the key things to watch for:
- Corporate earnings reports from large Russell 2000-listed companies, e.g., Nesco, Hertz, Viela Bio, and Crocs
- Federal Open Market Committee (FOMC) meetings
- Monetary policy announcements from the US Federal Reserve
- US interest rate decisions
- US GDP data
- US non-farm payrolls figures
- US manufacturing Purchasing Managers' Index (PMI)
- US Trade Balance numbers
- US retail sales data