Inside Markets — RTY Doubts

The small cap Russell 2000 (RTY) continues to outperform, which fits the ‘rulebook’ on investing when the yield curve is bullishly steepening. The current bull curve steepening is underwritten by expectations for a prolonged easing cycle, which typically follows a slowdown/recession and/or a period of disinflation. But the most recent flash PMI data (tends to lead hard data by 3-6 months) points to a period of accelerating growth with business activity expanding at the fastest pace since 2022, across both manufacturing and services. The PMI data also saw the largest build-up of uncompleted work since May 2022, which should ultimately drive labor demand. If the current slowdown in labor markets is more of a blip (1995) than a trend, then a so-called “insurance” rate cut from the Fed would be a bullish anchor for equities (assuming bond volatility remains contained). Unfortunately for the RTY, an insurance cut from the Fed is unlikely to produce a cyclical recovery.