US dollar index and performance of Russell 2000 small-cap stocks

Russell 2000 closed 3.91% higher on Tuesday with some index stocks going up by over 35% during the day.

US dollar index and performance of Russell 2000 small-cap stocks
The U.S. Dollar Index is used to measure the value of the dollar against a basket of six foreign currencies.

Russell 2000 Index is down by almost 20% but as the dollar weakened and yields looked to move down, the market went for a big rally on the first two trading days of October. To a long-term investor in small cap US stocks, this might appear to be an opportunity to buy them, keeping in context the reversal of the dollar index in near future.

Russell 2000 closed 3.91% higher on Tuesday. Some index stocks went up by over 35% during the day. One of the major reasons for the US dollar to gain strength in 2022 has been the US Fed’s tightening cycle and uber-hawkish stance in maintaining interest rates at an elevated level till inflation rolls down.

And, as the US dollar index soared to a two-decade high in the past two weeks, it has negatively impacted the equity valuation of companies including the small-cap corporates in the US economy.

As US Fed hikes rates, investors are willing to park funds in the US dollar thus enhancing its value. American businesses, especially those with foreign exposure, typically experience negative effects from a strong US currency.

The U.S. Dollar Index is used to measure the value of the dollar against a basket of six foreign currencies as Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.

Over the last few months, the strength in the dollar index has driven the small-cap Russell 2000 index down. Fed is expected to continue hiking rates well into 2023 and therefore, the valuation of the small-cap Russell 2000 index may see a further downside before any consolidation happens.

Also Read: US Stock Market Today: Are the bulls staging a comeback on Wall Street?

The small-cap sector of the US equities market is tracked by the Russell 2000 Index. Based on a combination of its market cap and current index membership, it contains about 2,000 of the smallest securities. The Russell 2000 Index is a subset of the Russell 3000 Index and represents approximately 7% of the total market capitalization of that index.

The top 10 stocks in the index include – Shockwave Medical Health Care, Biohaven Pharmaceutical Health Care, Karuna Therapeutics Inc Health Care, Chart Industries Inc Industrials, Rbc Bearings Inc Basic Materials, Matador Res Co Energy, Murphy Usa Inc Consumer Discretionary, Texas Roadhouse Inc Consumer Discretionary, Emcor Group Inc Industrials and Chord Energy Corp Energy.

Also Read: October begins on a positive note as Dow 30 and S&P 500 post big gains

More than trying to time the market, one can systematically buy into the market to manage risks. Before making an investment in small-cap companies, keep in mind that their volatility may be higher than that of large company stocks.

Due to their growing stage and overall lack of study, small-cap stocks are riskier than large-cap stocks. They are only recognized by the market and receive higher valuations once they reach a certain size.

However, several of these stocks are on a fast-growth trajectory, so the careful stock selection is necessary. For long-term investors who have thought through the returns and risks, the small-cap market represents a strong investment opportunity. Keep in mind that small-cap companies shouldn’t make up the majority of your portfolio before deciding to invest in them.

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