Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the Russell 2000 Is Beating the Nasdaq Right Now
Transcript
- Lucas: So the S&P 500 is up 0.3 percent over the past five days, the Dow is up 0.8 percent, but the Nasdaq is actually down 0.2 percent. Meanwhile the Russell 2000 — the small-cap index — has surged 3.1 percent. That is a striking divergence, and I think it tells us something about where the market is rotating right now. Luna: Yeah, that's a huge gap. Is this just a one-week anomaly, or are we seeing a real shift in leadership? Lucas: I think it's more than a blip. The Russell 2000 has been lagging for months — through the first half of 2026 it was essentially flat while the Nasdaq kept hitting new highs. But now we're seeing a catch-up trade, and the catalyst is pretty clear: interest rates are finally cooperating. The 10-year Treasury yield has dropped from 4.55 percent to 4.45 percent in just a few days, and the 2-year yield fell to 4.05 percent. Luna: So lower yields are helping small caps more because they tend to carry more debt? Lucas: Exactly. Small-cap companies are more sensitive to borrowing costs — they have less access to cheap bond markets, more floating-rate debt. When the 10-year yield drops ten basis points in a week, it directly improves their interest coverage ratios. Meanwhile mega-cap tech companies like Apple and Microsoft are sitting on huge cash piles, so they don't benefit nearly as much from a rate decline. Lucas: And there's another factor: the yield curve is now positively sloped again. The spread between the 10-year and the 2-year is 39 basis points, up from deeply inverted territory last year. Historically, when the curve uninverts and stays positive, small caps tend to lead the next cyclical rally. Luna: Right, I remember you talked about the yield curve uninversion a few episodes ago. But that was about the macro signal — now we're seeing the actual market rotation play out. Lucas: Precisely. In 2019, after the curve uninverted, the Russell 2000 outperformed the S&P 500 by about 8 percent over the next six months. The logic is that a steeper curve is good for banks — they borrow short and lend long — and small caps include a lot of regional banks. But it's also that lower rates revive the domestic economy, and small caps are more domestically focused. Luna: So is this the moment to sell some Nasdaq exposure and move into small caps? Or is it too late, since the Russell has already popped 3 percent? Lucas: That's the million-dollar question. The Russell 2000 is still down about 5 percent year-to-date as of June 13, so it's not like it's run away. But the Nasdaq is up maybe 8 percent in the same period. So you're buying small caps after a lag, not after a huge rally. I think there's still room to run if rates stay low, but the key is whether the Fed actually cuts later this year. Luna: The VIX is at 17.68, which is actually down 6.6 percent over five days. That doesn't scream panic. But the VVIX — the volatility of volatility — is at 93.82, up 1.5 percent. What does that tell you? Lucas: The VIX at 17.68 suggests the market is fairly calm about the next 30 days. But the VVIX being elevated — above 90 — indicates that options traders are pricing in a higher chance of a VIX spike. That's usually a sign of tail-risk hedging. So even as the broad market is relaxed, someone is paying up for protection. That could be related to the SpaceX IPO uncertainty, or it could be that the rotation itself creates volatility. Luna: Speaking of which — SpaceX is reportedly raising $75 billion in its IPO, and prediction markets say it could close above a $2 trillion market cap on debut. That's a lot of liquidity being sucked into one stock. Could that be distorting the Nasdaq numbers? Lucas: It's possible. The Nasdaq has a lot of mega-cap tech, and if traders are selling some of their existing positions to free up cash for the SpaceX allocation, that could pressure the index. But the Nasdaq is still the Nasdaq — it's got Microsoft, Apple, NVIDIA, Alphabet. One IPO, even a giant one, isn't going to move the entire index by 0.2 percent on its own. I think the rotation is broader than just the IPO effect. Lucas: Let me bring in another data point: real GDP growth annualized came in at 1.6 percent for the first quarter of 2026, up from 0.5 percent in the prior quarter. That's not booming, but it's a meaningful acceleration. If the economy is stabilizing, that's good for small caps because they're more cyclical. If we were heading into a recession, you'd want to stay in the safety of mega-cap tech. Luna: So the macro picture is actually supporting the rotation. But I'm wondering — is this just a temporary trade, or could small caps really lead for the next year? Lucas: I think it depends on what happens with inflation and the Fed. If inflation stays sticky, the Fed holds rates where they are, and the yield curve flattens again, small caps could get crushed. But if we get a soft landing with moderate growth and lower rates, small caps historically outperform by a wide margin. We're talking about the Russell 2000 trading at around 15 times forward earnings — that's cheap relative to the S&P 500 at 21 times. Luna: So the valuation gap is also on your side. That makes sense. Lucas: Yeah. And here's something funny — on this show, we have these conversations every week, and we try to take the noise and turn it into something you can actually use. We deliberately don't run ads on these. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: It's a good reminder. We don't have a paywall, no sponsors pushing products — it's just the two of us looking at the data and trying to make sense of it. Lucas: Exactly. So back to the rotation — if you're a long-term investor, I wouldn't go all in on small caps overnight. But I would start trimming some of the mega-cap tech that's had an incredible run and put some money into a Russell 2000 ETF. You don't need to time the bottom perfectly. The divergence we're seeing this week is a signal, not a final destination. Luna: And the signal is saying that money is moving. The question is whether you follow it or wait for confirmation. Lucas: Right. And that's the job — not to predict, but to prepare. We'll keep watching the yield curve, the VIX, and the Russell. Next week, we might be talking about how the SpaceX listing actually changes the index composition. But for now, the small-cap story is the one to watch.