US small-caps suffer worst week since February 2016

Smaller US company stocks have suffered their biggest weekly drop in a year and a half, as rising concerns over the North Korean situation spurred nervous investors to pull back from riskier assets.

The Russell 2000 index of small-cap companies clawed back some losses on Friday, ending the day up 0.1 per cent, but that only pared this week’s decline to 2.7 per cent. That is the steepest weekly fall since February 2016.

The Russell 2000 is now up just 1.3 per cent for 2017 as a whole, while S&P’s equivalent small-caps index, the S&P 600, is now in negative territory for the year.

Small-caps were one of the biggest beneficiaries from President Donald Trump’s election victory last November, on hopes that his promises of comprehensive tax reform and ramped-up government spending would invigorate the US economy and bolster smaller, more domestically-oriented companies. Small-caps were also more insulated from the dollar’s 2016 rise, given their mostly local revenues.

But many of the promised policies have thus far failed to materialise, sending the dollar lower. Mr Trump’s forceful rhetoric against North Korea — this week promising “fire and fury” if it threatened the US — and Pyongyang’s bellicose responses has shattered the calm that had descended over Wall Street for most of the summer.

“Issues around nuclear arms should never be trivialised and the War of Words is probably not over, keeping investors on edge, hoping the conflict remains one of words,” Jan Loeys, a senior strategist at JPMorgan, said in a note. “Investors remain nervous this month as August has a bad reputation, and it follows many months of remarkably stable markets.”

The broader US stock market edged slightly higher on Friday after an unusually sharp tumble on Thursday, but Mr Trump has continued to sound an aggressive tone, stating on Friday that “military solutions are now fully in place, locked and loaded, should North Korea act unwisely”.

Small-caps tend to be faster-growing but riskier companies than the corporate giants of the S&P 500, and this week’s concerns spurred investors to ratchet back their exposure to racier parts of financial markets.

The Vix index of short-term expected volatility dipped back on Friday, but remains elevated, and a popular exchange-traded note that bets on low turbulence slid more than 20 per cent this week, its biggest five-day tumble since September 2016.

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