Biggest consumer spending drop in over a year — and small-cap stocks closed at a record the same day. We decode why.

Retail sales fell 0.6% in July against expectations for a small increase. Consumer sentiment sank about 8% to 51. But the Russell 2000 closed at an all-time high, because a weakening consumer plus softer inflation reports eased fears of another Fed hike in September.

The bond market told a different story. The 10-year Treasury yield rose to 4.68% instead of falling on weak data — investors are pricing in inflation risk that has not gone away.

The reason sits in the Strait of Hormuz. The UAE blamed Iran for drone strikes on two of its oil tankers, and Washington threatened to hold its naval blockade indefinitely. Oil settled near $82, up more than 5% on the week. Energy led all sectors, up roughly 7%. Gas is still around $4 a gallon and consumers now expect 4.3% inflation next year.

Cheaper money versus more expensive energy. That's the whole tension.

The retailers deliver the verdict this week: Home Depot Tuesday, Target and Lowe's Wednesday, Walmart Thursday. If they confirm the pullback, that small-cap record gets much harder to defend.

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DISCLAIMER: I am not a licensed financial advisor. This content is for educational purposes only and is not financial or investment advice. Markets are volatile — always do your own research.

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