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Good Morning!
Before we jump in, a quick reminder that we have new stock alerts coming next week. Keep an eye on your inbox.
Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a choppy, range-bound week that ended essentially flat, as the market wrestled with two competing forces: renewed tensions in the Middle East and a jobs report that came in far stronger than anyone expected. Both pushed in the same direction on interest rates, and neither was what the market wanted to hear.
The week opened on a sour note as the U.S. and Iran exchanged fire for the first time in about a month, sending oil prices higher and energy stocks to fresh highs. That flare-up revived worries about energy-driven inflation and helped push bond yields up, with longer-dated Treasury yields climbing back toward the multi-decade highs that have pressured stocks all summer. Rising yields are a persistent headwind for the rate-sensitive smaller companies our readers focus on, so this was an unwelcome way to start the week.
The main event, though, was Friday's August jobs report, and it was a genuine blockbuster. The economy added 162,000 jobs, the most in five months and roughly triple what economists had expected. Just as importantly, the shocking job losses reported for July were revised away entirely, meaning the summer hiring scare that had rattled markets turned out to be a false alarm. The unemployment rate held steady at 4.1%, and wage growth stayed contained. By almost any measure, this was a picture of a resilient labor market.
Here is the twist: stocks fell on the good news. With the Fed having signaled at Jackson Hole that it is more worried about inflation than the job market, a strong labor report does not bring rate cuts closer. It does the opposite, raising the odds that the Fed could actually hike rates at its meeting later this month. Treasury yields jumped after the report, and the major indexes drifted lower to close out the week.
For small caps, this is a genuinely mixed picture. On one hand, a resilient economy and healthy labor market are fundamentally good for smaller, economically sensitive companies, and could help the beaten-down consumer and cyclical names that have lagged this year. On the other, rising yields and renewed rate-hike fears weigh directly on the rate-sensitive corners of the market. The strong economy helps the fundamental case even as higher rates work against it.
The bottom line: a flat, jittery week. Renewed Middle East tensions lifted oil early, and a blockbuster jobs report erased the summer growth scare but revived rate-hike fears. The economy is clearly holding up, but that resilience now cuts against the rate relief the market has been hoping for.
What's Coming Next Week
The calendar shifts to inflation, and it could not be more important. Markets are closed Monday for the Labor Day holiday, making it a shortened four-day week, but the August inflation report lands in the days that follow and is the single most important data point before the Federal Reserve's decision the following week.
After this week's strong jobs report, the inflation reading effectively becomes the deciding factor. If prices come in cooler than expected, the Fed can look past the hot labor data and hold steady, which would be a relief for stocks and especially for rate-sensitive smaller companies. If inflation runs hot, the odds of an actual rate hike climb, which would pressure the market further. A reading on wholesale prices is also due and will add to the picture.
Long-term Treasury yields remain the key variable to watch for small caps, since they have been the main source of pressure. And oil stays in the mix as a wildcard after this week's renewed hostilities, since any sustained rise there feeds straight into the inflation worries driving the Fed.
The bottom line heading into next week: after the holiday, all eyes turn to inflation. It is the last major data before the Fed meets, and it will determine whether rate-hike fears ease or intensify. A cool number is what smaller companies need to revive hope for lower rates.
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SmallCapStocks Team
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