Lots of Moving Parts

The stock market started to rotate out of LargeCaps and into SMidCaps after June's CPI was released on July 11 (chart). It showed lower-than-expected inflation, which increased the odds that the Fed would start cutting the federal funds rate (FFR) in September and triggered the rotation because small companies tend to depend more on floating-rate debt than large ones. Easier monetary policy would also reduce the likelihood of a recession, benefitting small companies more than large ones which can survive downturns more easily.

The Russell 2000 composite of small companies jumped 10.3% from July 10 (the day before the CPI report) through July 16 (the day that the S&P 500 rose to a record high). The next day, stocks were hit by news that the Biden administration is considering taking draconian measures to stop semiconductor equipment companies from selling to China. MAGS (the Magnificent-7 ETF) peaked at a record high on July 10 (the day before the CPI). It was hit hard on July 17 (on the Biden/China news) and again yesterday, July 24 (on bad news out of Tesla and Alphabet). The Russell 2000 has been trading sideways since July 16.