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(Bloomberg) -- The revival in small caps expected from Donald Trump’s America First agenda instead turned into a rout for shares in companies whose fortunes are most closely tied to the US economy.
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The Russell 2000 Index plunged 6.6% Thursday and is now down nearly 22% from its all-time high reached in late 2021. The index came within a whisker of that record in November after Trump’s reelection.
The president’s tariff announcement Wednesday roiled global financial markets with economists rapidly raising the odds for recessions in economies around the world. Small caps were supposed to benefit from Trump’s purported focus on revitalizing American manufacturing, but instead his haphazard trade policy has left business owners uncertain about the costs of everything from metals to raw materials and labor.
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“The greater uncertainty created by tariffs and how global trade will evolve in coming weeks is a huge hit for small caps,” said Michael O’Rourke, chief market strategist at JonesTrading. “While the group is expected to benefit from the hoped-for onshoring of production that is the goal of the tariffs, there will be significant friction and uncertainty for the foreseeable future.”
The index’s steady decline since touching a high in late November was led by energy, technology and consumer discretionary sectors that have all lost over a quarter of their market value since then. All eleven of the sectors are in the red over that period.
Biotechnology company Applied Therapeutics Inc. and solar power firm Sunnova Energy International Inc. were among the biggest percentage losers over the span, with Richard Branson’s space tourism firm Virgin Galactic Holdings Inc. and apparel company Victoria’s Secret & Co. also among major decliners.
Thursday’s big decliners included air freight company Forward Air Corp., furniture retailer Arhaus Inc. and apparel retailer Urban Outfitters Inc.
Small-caps typically tend to fall faster and deeper than the broader stock market as recessions approach. And they’re usually the first to rebound on the way out of a downturn, making the group a useful predictor in times of turmoil.
The tables have turned swiftly on small caps. They were initially seen as one of the biggest winners of Trump’s election victory on promises of a protectionist regime for US businesses, a stance investors expected to be a positive for these firms. That optimism fueled a furious rally in the group right after the presidential election and pushed the Russell 2000 within inches of its 2021 record in late November.