S&P 500 Recession Risk:
- The Russell 2000 to S&P 500[1] ratio slipped to 0.52, which marks the lowest since April 2008
- After tagging 0.52, the S&P 500 dropped over 43% by April 2009
- Although the Fed is forecasted to cut rates to sustain economic expansion, will the stock market crash in 2019 regardless?[2]
Does the S&P 500 to Russel 2000 Ratio Suggest a Coming Recession?
The S&P 500 traded above 3,000 for the first time in history[3] 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[4] and Nasdaq[5] 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. The S&P 500 dropped over 43% in the year following, but does a return to these levels suggest the S&P 500 is due for similar declines – or possible recession?
Small Caps Lag Behind Larger Counterparts
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 each 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
