Russell 2000 (IWM) retreats as the fear and greed index falls to 77

American stocks have had a tough start to the year as concerns about geopolitics and Fed continued. The Russell 2000 index, which tracks small cap companies in the US, has retreated to the lowest point since December 20th. It dropped to $1,985 while the Russell 2000 ETFs (IWM) and VTWO fell to $196 and $79.36, respectively.

Other American indices are not doing good either. The Dow Jones and S&P 500 indices have retreated in the past two days. They dropped by 200 and 25 points, respectively on Wednesday.

This sell-off has been triggered by the ongoing rebound of American bond yields. Data by Investing shows that the 10-year yield rose to 3.99% while the 30-year jumped to 4.13%. The 5-year Treasury yields rose to 3.96% while the 10-2 yield spread narrowed to minus 38.54.

Meanwhile, the US dollar index has also bounced back from last week’s low of $100.25 to a high of $102.20. In most cases, this performance is usually because of the risk-on sentiment among investors. The fear and greed index has retreated to 77 from last week’s high of 80. Still, it remains in the extreme greed area.

The Russell 2000 index has dropped because of the ongoing geopolitical challenges. As I wrote earlier on, Maersk and other shipping companies like Hapag-Lloyd and Evergreen have paused their Red Sea trips. They are instead using the longer Cape of Good Hope route.

The implication of all this is that it could lead to higher inflation. Data shows that ocean shipping costs have continued rising recently. Higher inflation could put pressure on central banks as they plan on rate cuts. In an interview on Wednesday, Fed’s Thomas Barkin warned that the bank could still hike rates. 

There are also lingering geopolitical risks in the Middle East. On Wednesday, a bomb attack killed 80 people in Iran, which vowed to retaliate. 

On the positive side, equities are facing numerous tailwinds like strong earnings growth and over $6 trillion in dry powder by financial services companies. These funds could be deployed this year through M&A or by investing in stocks directly.