‘Huge hit’: Small caps enter bear market

The small- and mid-cap-tracking Russell 2000 has entered bear market territory amid the widespread selloff triggered by the new “reciprocal” tariffs introduced by the U.S. administration. The index has lost nearly 22% from its November peak.

The Russell 2000 dropped 6.6% yesterday, April 3, which brought the drop from its 52-week high to 21.8%. A 10% loss from a yearly peak is considered a correction on Wall Street, while a decline of 20% or more qualifies as a bear market, CNBC notes.

“Small caps, in the first half of an economic recession, are usually down 13%, so it’s already worse than where we were for the average recession,” Stephen DeSanctis, small- and mid-cap equity strategist at Jefferies, told CNBC. “For the average bear market, small caps are down 26%, so we’re nearing that number,” he added.

Thursday’s biggest losers included companies in air freight (Forward Air Corp – down 28%), lingerie (Victoria’s Secret & Co – down 23%), furniture retail (Arhaus Inc – down 20%), and apparel retail (Urban Outfitters Inc – down 19%). Most of these companies rely heavily on imports to the U.S., meaning they may face significantly higher costs and lower margins with Trump’s new tariffs.

Other major indexes such as the S&P 500 and the Nasdaq Composite remain above bear-market levels and are still only in correction territory, off 13% and 18%, respectively, from their 52-week highs.

The issue is that smaller companies have less financial flexibility than larger ones and are more exposed to tariff cost shocks. Keith Lerner, co-chief investment officer at Truist, explained that smaller companies are being hit on two fronts: by a weakening economy and by high interest payments.

Michael O’Rourke, chief market strategist at JonesTrading, told Bloomberg that the uncertainty caused by tariffs and the unclear direction of global trade in the coming weeks is a “huge hit” for small caps.

Although small-cap stocks are currently facing headwinds, DeSanctis of Jefferies believes they could bounce back if the Fed resumes interest rate cuts.

He suggests that if the economy weakens further, the Fed might step in by summer. “That’s usually good for small caps,” he noted.

And while small caps are expected to benefit from an expected onshoring of manufacturing — which is the stated goal of the tariff hikes — the segment is likely to see significant turbulence and uncertainty for the foreseeable future, JonesTrading’s Michael O’Rourke concluded.