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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a historic week. For the first time in three years, the Federal Reserve raised interest rates, marking a decisive shift in the market's entire backdrop. After years of investors anticipating rate cuts, the Fed is now actively tightening to fight the energy-driven inflation that has built up all year.
The main event was Wednesday's decision. The Fed raised its benchmark rate by a quarter point, its first hike since 2023, and, just as importantly, signaled it expects to raise rates at least once more before year-end. The move was unanimous, and the chair laid out a notably hawkish path forward. This is a regime change: the central bank has made clear that taming inflation is its priority, even at the cost of slower growth and pressure on markets.
What forced the Fed's hand was the combination of oil above $100 a barrel, with the international benchmark touching roughly $109 midweek, and persistent inflation that simply has not cooled. That pressure was on full display in the bond market, where the 10-year Treasury yield hit 5% for the first time in nearly two decades, its highest level since 2007. These are generational levels that ripple through borrowing costs across the entire economy.
The market's reaction was volatile. Stocks slid heading into the meeting as yields climbed to 5%, then fell further on Wednesday after the hawkish hike and the signal of more to come. Thursday brought a sharp relief rally as oil and yields pulled back, helped by news that Saudi Arabia is moving to boost crude output, and as investors took some comfort that the Fed was backing its tough talk with action. Friday turned choppy again, with yields pushing back above 5% and the Dow slipping. For the week overall, stocks ended lower, with the Dow the weakest performer, down roughly 2%, while technology proved more resilient.
For the smaller companies our readers focus on, this is a genuinely challenging environment, and it is important to be clear-eyed about it. A Fed that is actively hiking, with more increases signaled and the 10-year at 5%, is a significant headwind for rate-sensitive smaller companies, which tend to rely more on borrowing and feel rising rates more acutely. Small caps lagged again this week. The potential silver lining is that a Fed acting decisively to crush inflation, especially if oil eases as it began to on Thursday, could set the stage for a more durable recovery down the road. But near term, caution is warranted, and careful stock selection matters more than ever.
The bottom line: the Fed hiked for the first time in three years and signaled more ahead, driven by oil above $100 and yields at 5%. The market is now adjusting to a higher-rate reality, and that adjustment weighs most heavily on smaller companies.
What's Coming Next Week
With the Fed decision behind us, the market turns to digesting the new higher-rate reality and the signal of another hike before year-end. Fed officials return to the speaking circuit, and every comment will be parsed for clues about how much more tightening is coming.
On the data front, the first read on September business activity arrives Wednesday, followed Thursday by the final look at second-quarter growth along with durable goods and jobless claims. The most important release comes toward the end of the week, when the August reading of the Fed's preferred inflation gauge is due. That number will show whether the energy-driven inflation is still building, which is exactly what will determine how many more hikes the Fed has in store.
Above all, watch yields and oil. The 10-year at 5% and crude above $100 are the two forces driving everything right now. If yields stabilize and oil continues to ease on the Saudi supply news, it would offer real relief to the rate-sensitive smaller companies that have struggled. If they push higher, the pressure intensifies.
The bottom line heading into next week: the market is recalibrating to a Fed that is now hiking. The inflation and activity data ahead will shape how much further this tightening goes, and for small caps, the path of yields and oil is everything.
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SmallCapStocks Team
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