Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / The Russell 2000 Is Crushing the Nasdaq Right Now
Transcript
- Lucas: So the Russell 2000 is up more than three percent this week, while the Nasdaq is basically flat to slightly negative. That's a pretty dramatic gap, and I think it's the most interesting thing happening in markets right now. Luna: Three point one percent to be precise. The Nasdaq is down about two-tenths of a percent over the same five days. That's a three-plus-percentage-point spread. When's the last time we saw that? Lucas: Not since late 2023, actually. And it's happening against a backdrop where the VIX is down to 17.68 — that's a six-and-a-half percent drop this week alone. So overall, the market isn't panicking. But money is clearly moving. Luna: Moving out of the mega-cap tech names and into smaller companies. The obvious question is: why now? Lucas: Right. Let's start with the bond market. The ten-year Treasury yield has dropped from 4.55 percent to 4.45 percent in just a few days. That's ten basis points lower. And the two-year is down to 4.05. So the yield curve is steepening, but from the short end coming down faster. Luna: Lower short-term yields are generally good for small caps because they tend to carry more floating-rate debt. So their interest expense goes down when rates fall. That's a pretty direct tailwind. Lucas: Exactly. And look at the yield spread — the ten-year minus two-year is now 39 basis points, up from 40, but more importantly it's been positive for a while now. The yield curve uninverted back in late 2024. Historically, when the curve steepens after an inversion, small caps tend to outperform over the next six to twelve months. Luna: So this week might be the start of a real rotation. But is it sustainable? We've seen false dawns before — like in 2025 when the Russell had a two-week rally and then gave it all back. Lucas: That's the key question. One thing that's different this time: the VIX term structure. The VIX itself is at 17.68, but the VVIX — which measures the volatility of the VIX — is at 93.82. That's actually up one and a half percent this week. So while headline volatility is low, the options market is pricing in more uncertainty about where volatility might go. Luna: Meaning traders aren't fully convinced this calm will last. They're hedging against a spike. That could be because of the Fed meeting coming up, or just general nervousness about the Nasdaq's concentration. Lucas: Right. The Nasdaq is still dominated by a handful of mega-cap names. If money starts rotating out of those, the index could look worse than the rest of the market. And the Russell is a much more equal-weight index by construction, so it benefits from that rotation. Luna: And speaking of the Fed — the ten-year at 4.45, the two-year at 4.05. The market is pricing in a decent chance of a rate cut later this year. If that happens, small caps could get another leg up. Lucas: Yeah, but we should be careful about reading too much into one week. The Russell is up 3.1 percent, but it's still down year-to-date. The Nasdaq is still up for the year. So this could be a relief rally in an underperforming segment rather than a genuine regime change. Luna: Good point. Let's look at the numbers. The Russell 2000 is at 2,944. That's still below its 2024 high. The Nasdaq at 25,889 is near all-time highs. So we're not talking about small caps leading a broad rally — we're talking about them catching up. Lucas: And the S&P 500 at 7,431 is up 0.3 percent this week. The Dow at 51,202 is up 0.8 percent. So the blue-chip, more value-oriented indices are doing okay. It's really the mega-cap growth stocks that are under pressure. Luna: Which brings us back to the yield curve. Lower rates typically benefit growth stocks more because their cash flows are further in the future. But if rates are falling because the economy is slowing, that's a different story. Growth stocks could get hit by both — slower earnings and still relatively high rates compared to the pandemic era. Lucas: Right. And that's the tension. The ten-year at 4.45 is still high by historical standards. It's not 2021 anymore. So small caps might benefit from lower short-term rates, but if the economy slows, their earnings could suffer. It's not a clean trade. Luna: What about the VVIX? You mentioned it's up. That seems to suggest there's more fear embedded in options than the VIX alone shows. How do you read that? Lucas: So the VIX is the market's expectation of S&P 500 volatility over the next 30 days. The VVIX is the expected volatility of the VIX itself. When the VVIX is elevated relative to the VIX, it means traders expect big swings in volatility — either up or down. Right now, the VIX is 17.68 and the VVIX is 93.82. Historically, a VVIX above 90 with a VIX below 20 has often preceded a vol spike. Not always, but it's a yellow flag. Luna: So if you're a long-term investor, what do you do with this? Stay the course? Or tilt toward small caps? Lucas: I think the most prudent move is to check your allocation. If you've been letting your tech winners run, you might be overweight mega-cap growth without realizing it. Rebalancing into small caps or value might make sense — not because of one week's data, but because the risk-reward has shifted. You're getting paid to diversify. Luna: And the yield curve uninversion supports that. Historically, after the curve un-inverts and steepens, small caps and financials tend to do well. The Russell has underperformed for years. A mean-reversion trade isn't crazy. Lucas: One quick honest thing — a handful of listeners chip in monthly via buy me a coffee dot com slash fexingo, and that literally funds making this many episodes. It keeps the show ad-free and independent. If our money conversations have helped you think about a decision differently, that's the place. Luna: Yeah, and we really mean it — no ads, no sponsors, just listeners who find value in it. It's how we keep the show going. Lucas: Back to the rotation — one more data point. The NYSE composite is up 1.6 percent this week. That index includes a lot of financials and industrials, not just tech. So the breadth is actually pretty good. It's not just small caps — it's a broad-based move away from the Nasdaq leaders. Luna: So the headline might be 'Nasdaq flat,' but underneath, a lot of stocks are doing well. That's a healthy market, at least for now. Lucas: Exactly. And the worst-case scenario for the Nasdaq is that this rotation accelerates. If the VIX spikes to 25 or 30, the mega-caps could get hit hard. But if the economy stays okay and rates keep drifting lower, small caps could have room to run. Luna: So your takeaway for listeners: watch the VIX and the ten-year yield. If the VIX stays below 20 and the ten-year holds around 4.5 or lower, the rotation might have legs. If the VIX breaks above 22, be cautious. Lucas: And don't overreact to one week. But do use it as a prompt to re-examine your portfolio. The Russell 2000 at 2,944 is still cheap relative to where it could be if the economy reaccelerates. It's a risk worth taking for long-term investors. Luna: Alright. Next week we'll dig into the SpaceX IPO and what it means for retail investors. That's going to be a big one. Lucas: It really is. But for now, keep an eye on those small caps. They're finally getting some love.