small-cap stocks rise in good sign for economy

June has been a good month for the Russell 2000, the index that tracks 2,000 of the smallest publicly traded companies in America. While the Russell hit an all-time high of above 2,300 points in 2021, today it is at 1,863—nearly 25% below its all-time high as of this writing.

But the index is up 6.5% since the beginning of the month.

The rise is no doubt good news for investors and the companies on the index, but why is the Russell surging now? The Wall Street Journal says a reason for the surge could be that investors are more positive about the outlook of the U.S. economy now than they have been in months. That 6.5% rise in June is the Russell’s best performance since January, and it could signal that the health of the U.S. economy is getting better, at least in investors’ eyes.

When economic signs are bad, investors often flee to the relative safety of large-cap stocks, but when the near-term economic outlook begins to get rosier, investors don’t mind making riskier investments—like in the small-cap stocks the Russell 2000 tracks.

And that investor willingness to put money into the Russell 2000 could perhaps trickle down to the consumers, many of whom have been holding back on discretionary spending for the past 18 months due to inflationary and recession fears, not to mention fears of layoffs.

If the investors currently propping up the Russell 2000 are right, and recessionary fears are indeed receding, consumers may begin to feel that they can be a little less cautious with their discretionary spending, too, which could lead to more economic activity at businesses large and small, regardless of their inclusion on the Russell 2000.

Of course, something could happen next week that knocks the Russell off its June climb, but for now, its rise could be interpreted as a sign that the economy may be on better footing than many people assumed.