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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 jittery, mostly downbeat week that came down to one thing above all else: oil surging back above $100 a barrel. Stocks fell for the first three sessions of this holiday-shortened week before a relief rally on Friday clawed back much of the damage, though the market still ended lower overall. Everything unfolded in the shadow of next week's pivotal Federal Reserve decision.
Oil was the dominant force. Escalating tensions in the Middle East drove crude sharply higher, with U.S. crude settling right at $100 and rallying nearly 10% on the week, while the international benchmark climbed about 9%. That is a major move, and it reignited the inflation fears that have dogged this market all year. The immediate consequence showed up in the bond market, where the 10-year Treasury yield spiked to its highest level since late 2023, pushing into multi-decade-high territory. Notably, the Treasury tripled the size of its buyback program for longer-dated debt in an effort to tamp yields down, but the pressure from surging oil overwhelmed it and yields climbed anyway. For the rate-sensitive smaller companies our readers focus on, that combination of higher oil and higher yields was a real headwind, and the small-cap index took some of the hardest hits during the week.
The other focus was inflation data landing right before the Fed meets. Wholesale prices came in mostly in line, though the annual rate ticked up, and Friday's consumer inflation report was roughly in line with expectations, with the headline rate holding steady and the core measure only slightly hotter than forecast on the month. Crucially, it was not the big upside shock some had feared, and with oil easing on Friday, stocks staged a broad rally to close the week, with the Dow jumping about 1%.
The bottom line: oil back above $100 drove yields to multi-decade highs and pressured stocks for most of the week, but roughly in-line inflation and a late pullback in oil sparked a Friday bounce. The data did little to settle the big question, which is what the Fed does next.
What's Coming Next Week
Everything points to the Federal Reserve's decision on Wednesday. This is the single most important event on the calendar, and it is a genuine cliffhanger. After the strong jobs report and this week's oil surge, the market is split on whether the Fed holds steady or delivers what some are calling a risk-management hike, a precautionary move to guard against energy-driven inflation. The decision itself, the Fed's updated economic and rate projections, and the chair's press conference will set the tone for markets into year-end.
For small caps, the stakes could not be higher. A decision to hold, or any signal that the Fed sees rate relief on the horizon, would be a meaningful boost for the rate-sensitive smaller companies that have struggled under the weight of rising yields. A hike, even a small one, combined with yields already at multi-decade highs, would add to the pressure.
Beyond the Fed, retail sales and housing data are due, offering fresh reads on the consumer and the economy, though they will be overshadowed by Wednesday's decision. And oil remains the overriding wildcard. With crude above $100, any further escalation in the Middle East would push it higher and harden the case for the Fed to act, while any de-escalation would bring welcome relief.
The bottom line heading into next week: the Fed decision is everything. Small caps, battered this week by surging oil and multi-decade-high yields, have a great deal riding on the outcome and on what the Fed signals about the path ahead.
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SmallCapStocks Team
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