Small—Cap Stocks Got a Payrolls Boost — But CPI Is the Real Test

A surprise contraction in US payrolls has given the stock market a break from worrying about a near-term interest-rate increase. Whether it gives small-cap stocks a durable reprieve depends on Wednesday’s inflation report. Nonfarm payrolls fell by 23,000 in July, against forecasts for an 83,000 gain. The shock drove the two-year Treasury yield to a three-week low and led futures traders to abandon bets for a September Federal Reserve rate increase. Small caps rallied further, and iShares Russell 2000 ETF (NYSE: IWM ) is up around 22% year-to-date, outperforming both State Street SPDR S&P 500 (NYSE: SPY ) and Invesco QQQ Trust (NASDAQ: QQQ ), which rose by 13% and about 17% respectively. The Russell 2000’s Structural Trap Small caps are structurally tied to interest rates. According to The Kobeissi letter, Russell 2000 companies devote roughly 31% of earnings before interest, taxes, de...