The Russell 2000 index is in trouble as interest rates punish America’s small-cap companies get punished by high-interest rates. The closely watched iShares Russell 2000 ETF (IWM) has plunged to $163.72 and is hovering near the lowest level since November 2020.

Interestingly, the IWM ETF is on track for dropping for three straight months. And these drops are at least 5%, which is the first time it has done that since 2008, during the Global Financial Crisis (GFC). 

The main reason why the Russell 2000 index has tumbled this year is that interest rates have surged to the highest level in more than two decades. And worse, there are signs that the Federal Reserve will deliver another hike later this year.

For one, the most recent economic data shows that the American economy expanded by 4.9% YoY in the third quarter, the biggest increase since 2020. Additional data published this week showed that the manufacturing and services PMIs rose above the expansion zone of 50. New home sales also jumped at a faster pace than expected.

High-interest rates affect all companies in the United States. However, unlike large-cap companies like Meta Platforms and Apple, small-cap ones tend to suffer more. For one, many of these companies, especially in the biotech industry, tend to be unprofitable.

Therefore, companies like Meta Platforms and Google that have billions of dollars in cash and little debt are making millions of dollars in interest income. For example, Meta Platforms interest income in the last quarter came in at over $272 million.

Therefore, many small-cap companies will likely remain under pressure in the next few months if the Fed maintains a hawkish tone. These firms are seeing slower revenue growth and higher interest expense. Many of them are also struggling to raise capital as liquidity worsens.

IWM chart by TradingView

The monthly chart shows that the IWM ETF has been under intense pressure in the past few months. It has tumbled for three straight months and crossed the important 25-month and 50-month moving averages.

The ETF is also approaching the 38.2% Fibonacci Retracement level while oscillators like the RSI and the MACD have pointed downwards. Therefore, the outlook for the Russel 2000 index and IWM ETF is bearish, with the next support level being the 50% retracement point at $130.

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