Friday looked fine from the top. The S&P 500 and the Nasdaq each rose 0.6%, the Dow gained 423 points, and all three finished the week higher. The S&P ended at 7,811.54, just 7.39 points under the 7,818.93 record it set Tuesday. Look lower down and the week reads differently. The Russell 2000, the index of smaller companies, fell for a fifth week in a row. That's its longest losing run since May 2022.
The Journal's Vicky Ge Huang lays out the squeeze. Big companies sell bonds and lock in a rate for years. Small ones mostly can't. They live on short-term and floating-rate loans that reset as the Fed moves. The Fed made its first rate increase in three years last month. Investors expect more. The 10-year Treasury yield ended Friday at 5.243%. Earlier in the week it hit its highest level in 24 years. A month ago it stood at 4.836%. Fuel and other costs were already biting. David Miller of Catalyst Funds calls it a “dual squeeze.” Bank of America adds a third worry. Its analysts say a growing share of small companies' long-term debt falls due in the next five years. Those companies would have to refinance at higher rates.
Inside the Russell, health care and consumer-discretionary stocks have taken the worst of it since the streak began. Consumer discretionary means the sellers of things people can put off buying. A young biotech company can spend years in trials with no profit, and it borrows to get there. Companies that sell to households are hurting too. Their customers pay more for credit, and inflation hasn't let up. Caribou Biosciences (CRBU) lost 62% this week after saying it would cut jobs and weigh its options. Neighborhood Intelligence (NXH), once Bed, Bath and Beyond, dropped 39% in the same week. Both hit new 52-week lows Friday. One caution on the paper's headline. The surge in yields is a month-long story. On the week itself, yields ended a touch lower. The Bloomberg U.S. Treasury index yielded 5.080% Friday against 5.120% a week earlier.
A rising index can hide a falling market
Here's the part we'd underline. On a day the S&P 500 rose 0.59%, 123 NYSE stocks hit new 52-week lows and only 42 hit new highs. On the Nasdaq it was 275 lows to 90 highs. Bank of America's analysts see a hopeful side. By their count, small stocks now trade cheaper than they usually did in past stretches when rates sat between 5% and 7%. If rates peak soon, the bank says, small stocks could bounce back. That is the bank's call. We don't make one.
Our read
Investments and risk (IN04). An index can rise while many of the stocks under it fall, and this week it did. The giants that carry the S&P 500 can lock in borrowing for years. Small companies mostly can't. We said in print that we were wrong on the timing of the record, and we still aren't chasing it. No new money went into stocks this weekend. Our September letter set three tests for adding, and one passes. The VIX's own volatility gauge, the VVIX, sits under 90 by our pull. Two fail. Core inflation ran 0.27% in August, above our line, and the Fed raised rates last month. Small-company funds sit in a handful of our model books (VSMAX in 4, VB in 3, VBR in 2, IWM in 1, AVUV in 1). Held at weight. Nothing added. Safe money stays in Treasury bills and floating-rate paper (SGOV in 49 books, USFR in 14).
For a household, the lesson is what you own under the label. If your stock fund tracks the S&P 500 or the whole market, a few giant companies decide your year. If you also own a small-company fund, this is the stretch where it earns its keep or doesn't. Know which you hold and how much, before the next rate move tells you. The time to look at the roof is while it's still dry.