Weekly Newsletter October 5th to October 9th
RECAPPING LAST WEEK
U.S. equity markets overall continued to rise, with both the S&P 500 and Nasdaq notching fresh all-time highs. The beleaguered Russell small cap index, however, continued to underperform. European markets were down modestly while Asian markets advanced. Treasury yields surged to fresh highs on Wednesday before cooling by the week’s end as rates and borrowing costs remained a major focus. On Friday, the Energy Information Administration reported that Hurricane Isaias, at that point rated a Category 3 storm, was impacting offshore crude oil and natural gas production in the U.S. Gulf Coast region. The U.S. Martine Minerals Administration estimated about 63% of the daily oil production and around 57% of natural gas production has been shut in, based on offshore operator reports from Thursday at mid-day. These events were projected to have a negligible (2 to three cent) impact on gasoline and diesel prices, but that is overshadowed by events happening in the Middle East and Russia impacting the oil market. Expensive energy, elevated yields, and geopolitical uncertainty have made markets more susceptible to negative surprises and have resulted in a more cautious stance by investors, reflected in broad equity fund outflows, weakening participation in the equity rally, and a shift toward bond and money-market funds. Bond fund inflows, meanwhile, were at record levels throughout the week. Risk appetite shows a more selective positioning, with inflows into technology, utilities, and industrials despite the broader equity fund outflow. OpenAI’s diminished annualized revenue projections reflected greater scrutiny of ballooning financing needs and costs relative to potential AI future returns. Bitcoin and gold were down most of the week, rebounding Friday. Federal Reserve minutes released Wednesday reinforced the higher-for-longer message regarding interest rates. Committee members see a resilient economy alongside stubborn inflation, and most expect additional tightening as needed. While the minutes didn’t telegraph an urgent series of rate hikes, they provided little reason to expect near-term policy relief. The future forecasted volatility of bonds has lurched higher over the past several weeks. The MOVE index uses an options-pricing model based on a weighted average of option probabilities to show collective expectations for future volatility in the fixed income market. It’s interpreted as a “VIX for bonds”, so it’s notable that its own divergence from the very low S&P 500 VIX levels is the largest it’s been since the turmoil last year surrounding Liberation Day. Additional economic reports such as the ISM Services PMI, while below forecast and last month’s reading are still showing expansion. Consumer confidence deteriorated, by 3.7% for the month, and the Current Economic Conditions Index tumbled by 12.2% month-on-month and is down 23.7% compared to October 2025.
THE WEEK AHEAD
Look for the market to focus on credit-market stability and earnings quality. Market participation and money flows will be influenced primarily by Wednesday’s September CPI release, as well as major bank earnings reports—all of this will impact interest rate concerns. U.S. stock markets are open for Monday’s Columbus Day holiday, but bond markets will be closed. Bank earnings kick off Tuesday with a slew of key quarterly reports from JPMorgan (JPM), Goldman Sachs (GS), Wells Fargo (WFC) and Citigroup (C). Analysts will be busy parsing credit quality, loan growth, trading revenues, deposit costs, and the all-important read-through on consumer health. The follow up PPI this Thursday will offer additional context for Wednesday’s CPI reading--should CPI ease, oil remain below recent highs, and Treasury yields retreat, we may see a more positive tone. More bullish participation of small caps would further cement a broad-based rally, as would continuing containment of high yield spreads alongside strength in crypto and a weakening U.S. dollar.
CHART OF THE WEEK
Small Caps, Big Tests
The Russell 2000 remains in a longer-term uptrend but has experienced meaningful pressure since its August peak, with higher interest rates and surging treasury yields being primary culprit. Higher borrowing and re-financing rates disproportionally impact smaller cap companies because they carry a higher proportional debt level compared to large cap companies. Rising rates can force smaller businesses to service debt at much steeper costs, squeezing profit margins. It can also lead to lower credit ratings, which means higher risk premiums when they borrow. Adding to the pressure, investors often pull their capital away from small caps when treasury yields spike due to risk concerns. That capital then funnels into large cap or mega cap companies for safety. As indicated in the RUT (Russell 2000 Index), small caps as an index have declined approximately 8- 9% since the all-time high of 3069.71. The 10-day simple moving average has crossed below the 100-day moving average, confirming the current pressure. However, hope is not lost yet. The closing quote of RUT on 10/08, landed nicely atop of the 200-day simple moving average. That average remaining below current prices could mean the broader bull trend is still intact despite recent weakening. Momentum indicators reinforce this stabilization theme. Represented by the MACD at the bottom of the chart, the MACD line remains below zero while displaying a bullish divergence and shows a steady improvement in the histogram crossing into a positive territory indicating fading downside momentum and the potential for a bullish momentum crossover.
Source: Charles Schwab Corporation
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