Small-cap stocks have recently caught the attention of investors, driven by expectations of upcoming interest rate cuts signaled by Federal Reserve Chair Jerome Powell. Following a significant selloff in early August, there has been renewed interest in small-cap ETFs, like the iShares Russell 2000 ETF, which saw a net inflow of over $688 million last week. 

However, the erratic nature of these investments has some investors weighing the potential for a rebound against the risks associated with this speculative market segment. 

Historically, small-cap stocks have been more sensitive to changes in interest rates and economic conditions, benefiting more directly from lower borrowing costs. The S&P SmallCap 600 Index, for example, has shown gains following initial Fed rate cuts, but with notable downturns in past cycles such as 2007 and 2019. 

Finsum: There is going to be a lot of potential growth for interest rate sensitive small caps as rate hikes ramp up. 

While stock selection often gets the most attention, the true driver of portfolio performance is typically asset allocation, with around 90% of variability linked to how investments are distributed across asset classes. Different asset classes perform well under different economic conditions—stocks might excel in growth periods, while bonds provide stability during downturns. 

Goldman Sachs has analyzed various economic scenarios to suggest optimal asset mixes for maximizing risk-adjusted returns over the next decade. For sluggish growth or stagflation, they recommend a heavier allocation to Treasury bonds and real assets, while minimizing exposure to growth stocks. 

In a scenario of strong growth and low inflation, the maximum allocation to stocks should still be capped around 70%. Ultimately, a diversified mix, including US Treasuries, remains crucial regardless of the economic outlook.

Finsum: Keep in mind the relative risk profiles of these asset classes when constructing your portfolio. 

The cryptocurrency market experienced a sharp downturn recently, with Coinbase suffering its worst week of the year and Marathon Digital plummeting by 20%. Broader crypto-related equities hit their lowest point since February, reflecting concerns about the U.S. economic outlook and a general decline in risky assets, including Bitcoin and Ether. 

Historically, September has been a challenging month for crypto, adding to the pessimism; the Crypto Fear & Greed Index is now in "Extreme Fear." Market volatility was compounded by weak U.S. labor data, further impacting investor sentiment. 

Despite these setbacks, trading volumes rose in August, suggesting some continued market engagement. Attention is now on the Federal Reserve's potential interest rate cut, which could impact crypto markets.

Finsum: We are seeing an increased correlation between crypto and traditional market moving news, this could be a long term trouble or a short term reflection of the asset classes risk.