Recession Trade Quickens in Cheap Stocks Bulls Refuse to Embrace

A vicious six-month repricing has rattled investor nerves but has done little to make the US stock market cheap. An exception is small caps. And yet that’s the group that traders are bailing from the fastest as the threat of a recession looms.

The $49.3 billion iShares Russell 2000 ETF (ticker IWM), which tracks its namesake index of small-cap stocks, has lost over $4.3 billion year-to-date. This includes nine days of outflows in the last 10 sessions. Meanwhile, Charles Schwab’s $12.5 billion US Small-Cap ETF (SCHA) was drained of $309.9 million in Wednesday’s session, it’s largest one-day decrease since September 2021, according to data compiled by Bloomberg.

For bulls searching for signals that the worst is over, the exodus from smaller companies is ominous because the group is traditionally viewed as the most exposed to the domestic economy. The signal hits harder considering that among indexes kept by S&P, those firms trade as much as 25% cheaper than the rest of the market.

“Whenever there were headlines that a recovery was in play and all of a sudden all the case counts went down, the first stocks to rebound were the small caps,” Victoria Fernandez, chief market strategist at Crossmark Global Investments, said by phone. “I think you would see the reverse as people fear a recession.”