Inflation and interest rates deal a double blow, Russell 2000 plunges 11% from its August high, marking its first technical correction since March.

Note that the Russell 2000 index entered correction territory with Wednesday's sharp selloff, as rising inflation and interest rates push the market's riskiest stocks below key moving averages. The small-cap gauge is now down more than 10% from its recent peak, recording its first technical correction since March after a 1.9% drop on Wednesday. Wednesday's decline was broad-based, with decliners outnumbering advancers by about five to one. Overall, the gauge is down 11% from its August high. The inflation report released Wednesday showed prices rose in September at the fastest pace since April, with core inflation coming in above expectations. "Small caps are highly sensitive to rates, and to the extent that today's data raises the risk of higher policy rates, that's a bad signal for small caps," said Stefano Pascale, head of U.S. equity derivatives research at Barclays. Small-cap index down 11% from peak For most of this year, the Russell 2000 outperformed the S&P 500, as small caps are highly correlated with economic growth, which has been driven by strong consumer spending and massive corporate investment in artificial intelligence (AI) infrastructure. However, after the Federal Reserve raised rates and bond and Treasury yields surged, the index gave up its lead last month. Small caps tend to be more sensitive to interest rates than large caps. In fact, as rates climbed, the index has fallen below multiple support levels, breaking below its 200-day moving average this week for the first time since March. It had previously fallen below its 100-day and 50-day moving averages in September and August, respectively. The index has been in a downtrend since forming a bearish V-shaped reversal pattern in August. This week, it broke below the 23.6% Fibonacci retracement level around 2,754 points which had previously served as support. Dennis DeBusschere, president and chief market strategist at 22V Research LLC, said Wednesday's CPI increase raises the risk of further tightening in financial conditions, which will "pose a persistent longer-term headwind for small caps," as well as for consumer and transportation stocks. Earlier this year, after a massive index rebalancing, the small-cap gauge's high-quality constituents also fell sharply. As of June 29, Bloom Energy Corp. (BE.US), Credo Technology Group Holding (CRDO.US), Sterling Infrastructure Inc. (STRL.US) and TTM Technologies Inc. (TTMI.US) together contributed two-thirds of the Russell 2000's gain, and on that very day, all four companies were moved into the Russell 1000 index.