Financial Commentaries

MARKET COMMENTARY

March 19, 2019
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Market Commentary – Week of 03.19.2019

MOVING ON UP (IN MARKET CAP)

Large caps may be better positioned than small caps, given where we are in the business cycle. Small cap stocks have performed well so far in 2019, with the Russell 2000 Index, the most popular small cap benchmark, up 15.2% year to date compared with the 12.6% gain in the large cap S&P 500 Index. Small caps tend to do better when economic growth expectations improve and stocks broadly rally, which has been the case since late December 2018. However, we believe the environment is getting tougher for small caps, for reasons we discuss below.

FIVE REASONS TO FAVOR LARGE CAPS OVER SMALL

We favor large cap stocks over small primarily for these five reasons:

1. Age of the economic cycle. Large caps tend to do better late in the economic cycle. Small cap underperformance in 1989, 1990, the late 1990s, and 2007 are the most recent examples of late cycle small cap underperformance (based on the Russell 2000 and S&P 500). We don’t see recession in 2019, but after 10 years of economic growth, we recognize the cycle is probably in its latter stages. Small caps tend to underperform large caps during economic recessions, which markets may increasingly begin to price in over the next year or two….. (cont’d)

KEY TAKEAWAYS IN THIS WEEKS ISSUE

  1. Small cap stocks have performed well so far in 2019; however, we believe the environment is getting tougher.
  2. Large caps may take the baton and sustain leadership as small cap performance potentially enters a weaker phase.
  3. Small and large cap stocks may both deliver gains over the rest of the year, but we expect large caps to lead..

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