The NFIB small business optimism index for July reached 100.3, exceeding expectations of 98.6. This increase comes from business owners noting improved conditions and a good time for expansion. However, optimism is coupled with rising concerns. The Uncertainty Index jumped eight points from June, now sitting at 97. Labor quality is the top worry for 21% of small business owners, which is a five-point rise from last month.

Small Business Optimism and Growing Market Fears

The small business optimism increase to 100.3 is a good sign for the economy, especially for small-cap stocks. However, the significant eight-point rise in the Uncertainty Index to 97 is even more important. This shows that, while optimism is up, market nervousness is also increasing. A high Uncertainty Index means we should expect larger price fluctuations in the coming weeks. The VIX has risen to about 18 recently, which is a considerable jump from its lows in the spring of 2025. This situation makes it appealing to buy options like straddles on indices such as the Russell 2000, especially as we anticipate volatility around upcoming economic reports. Labor quality, the report’s main concern, highlights ongoing wage pressures, which were evident in the July 2025 CPI reading of 3.4%. This puts the Federal Reserve in a challenging position, even after keeping rates steady in June and July. Interest rate markets still predict a roughly 40% chance of another rate hike this year, potentially hindering major stock market gains.

Opportunities in the Russell 2000

The announcement that businesses view this as a good time to expand is especially positive for the Russell 2000 index of small-cap companies. This index has lagged behind the S&P 500 for most of 2025, so this could spark a catch-up trade. We might think about selling out-of-the-money puts on the IWM ETF to earn premiums, betting that this optimism will support prices. We are currently in a market with mixed signals, similar to the economic conditions of 2022 and 2023. Back then, strong economic data often conflicted with inflation fears, resulting in choppy markets. This suggests that rather than betting on a single direction, focusing on relative value trades or volatility may be a smarter strategy. Create your live VT Markets account and start trading now.

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