Economic Indicators - The US nonfarm payrolls for January increased by +130,000, surpassing expectations of +65,000, marking the strongest growth in 13 months [3] - The unemployment rate for January unexpectedly decreased by -0.1 to 4.3%, indicating a stronger labor market than anticipated [3] - Average hourly earnings rose by +3.7% year-over-year, aligning with expectations [3] - The annual benchmark revision to 2025 US payrolls showed a reduction of -862,000 jobs, which was larger than the expected decrease of -825,000 [3] Federal Reserve and Interest Rates - The dollar index (DXY00) increased by +0.08% after a better-than-expected US payroll report, which led to higher T-note yields and reduced speculation of further Fed interest rate cuts [1] - The probability of a Fed rate cut at the upcoming FOMC meeting dropped to 6% from 23% prior to the payroll report [1] - Kansas City Fed President Jeff Schmid emphasized the need to maintain rates at a "somewhat restrictive" level to prevent prolonged high inflation [4] - Swaps markets are pricing in a 6% chance of a -25 basis point rate cut at the next policy meeting on March 17-18 [5] Mortgage Market - US MBA mortgage applications decreased by -0.3% for the week ending February 6, with the purchase mortgage sub-index falling by -2.4% and the refinancing sub-index rising by +1.2% [2] - The average 30-year fixed mortgage rate remained unchanged at 6.21% from the previous week [2]

Core Insights - Small cap stocks, defined as companies with market values between approximately $300 million and $2 billion, are known for their potential to deliver significant gains but can also be volatile during uncertain times [1][2] Economic Conditions - Small caps tend to perform well during economic expansions, as they are more focused on domestic markets, making their success closely tied to local economic health [2] - The post-pandemic recovery in 2020 and 2021 saw a surge in U.S. small caps, which outperformed larger companies due to rebounding domestic demand [2] Labor Market Influence - A strong labor market positively impacts small cap performance, as lower unemployment rates lead to increased consumer spending, benefiting sectors like retail and hospitality where small caps are prevalent [3] Interest Rates - Small caps are more sensitive to interest rates, as they often rely on borrowing for growth. Low rates facilitate investment and hiring, while rising rates can hinder growth [4] - Predictability in interest rates from central banks boosts investor confidence, further benefiting small caps [4] Public Policy Impact - Government interventions such as tax incentives, deregulation, and fiscal stimulus can provide significant support to small businesses, enhancing their recovery and growth prospects [5] Valuation Dynamics - After periods of underperformance, small caps may appear undervalued compared to large caps, attracting value investors when fundamentals improve [6] Multi-Factor Catalysts - A small cap catch-up is typically driven by a combination of factors including economic growth, favorable monetary policy, strong labor markets, attractive valuations, and changing investor risk perceptions [7]