Bond market trumps Fed in impact on small cap stocks – Kayne Anderson Rudnick

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The 10-year bond yield (US10Y [https://seekingalpha.com/symbol/US10Y]) is more important to small caps (IWM [https://seekingalpha.com/symbol/IWM]), (SPSM [https://seekingalpha.com/symbol/SPSM]) than a possible Federal Reserve interest rate cut, according to Julie Biel, Kayne Anderson Rudnick chief market strategist.

During an interview with CNBC, Biel said the bond market (SPLB [https://seekingalpha.com/symbol/SPLB]), (GOVI [https://seekingalpha.com/symbol/GOVI]), (SPTL [https://seekingalpha.com/symbol/SPTL]) is currently more influential than Federal Reserve actions for small cap stocks despite the Fed’s signals toward a September rate cut.

While the Fed controls the front end of the yield curve, Biel emphasized that longer-term rates have a greater impact on the broader economy.

“The proof of that is that if you look at what the 10-year (US10Y [https://seekingalpha.com/symbol/US10Y]) did after J. Powell’s comments on Friday was not much,” she noted, pointing to the minimal movement in bond yields despite rate cut expectations. She also highlighted how the mortgage market dynamics [https://seekingalpha.com/news/4487976-mortgage-rates-remain-flat-ww] demonstrate the bond market’s outsized influence compared to Fed policy.

Small cap stocks (IWM [https://seekingalpha.com/symbol/IWM]), (SPSM [https://seekingalpha.com/symbol/SPSM]) have struggled significantly due to inflation pressures and their reliance on variable rate debt. Biel indicated that small caps are finally showing some earnings improvement after inflation “really killed their profitability,” suggesting potential relief ahead as margins improve, and interest rate cuts appear on the horizon.

Healthcare (PSCH [https://seekingalpha.com/symbol/PSCH]) stands out as a particularly promising sector within small caps, despite being “a persistent underperformer across market caps.”

Biel specifically highlighted companies with strong competitive positioning: LeMaitre Vascular (LMAT [https://seekingalpha.com/symbol/LMAT]), which dominates niche markets in vascular surgery; The Cooper Co. (COO [https://seekingalpha.com/symbol/COO]), a leader in the consolidated contact lens market; and West Pharmaceutical Services (WST [https://seekingalpha.com/symbol/WST]), which produces injectable drug delivery systems with recurring revenue characteristics.

Investors approaching small caps should prioritize active management, as Biel noted that “40% of the benchmark is non-profitable.”

She recommends focusing on companies with “high quality earnings” and durable business models, concluding that small cap exposure should be “part of any balanced diet” for investors seeking comprehensive market participation.

Investors can see how yields are trading across the entire curve here on Seeking Alpha’s bond page [https://seekingalpha.com/etfs-and-funds/etf-tables/bonds#hasComeFromMpArticle=false#source=section%3Amain_content%7Cbutton%3Abody_link%7Cfirst_level_url%3Anews].

MORE ON UNITED STATES 10-YEAR BOND YIELD:

* Santa Claus Is Coming [https://seekingalpha.com/article/4816489-santa-claus-is-coming]
* Weekly Market Pulse: A One-Handed Economist [https://seekingalpha.com/article/4816393-weekly-market-pulse-a-one-handed-economist]
* The Downfall Of The U.S. Dollar - Peter Schiff's Prediction [https://seekingalpha.com/article/4814921-downfall-of-us-dollar-peter-schiff-prediction]
* Bond king Bill Gross says 'stay mildly bearish' on US10Y post Jackson Hole [https://seekingalpha.com/news/4488775-bond-king-bill-gross-says-stay-mildly-bearish-on-us10y-post-jackson-hole]
* Cleveland Fed Pres. Hammack: Inflation is too high and trending higher [https://seekingalpha.com/news/4488419-cleveland-fed-pres-hammack-inflation-is-too-high-and-trending-higher]