Key Points

  • Friday, the S&P crossed 3k; which followed the Dow’s 27k cross and the NASDAQ’s 8k cross last month; with small caps not in gear.
  • Round numbers are more psychological than technically-important and have helped boost most measures of investor sentiment back into optimistic territory.
  • Round number cheering is being accompanied by rate cut cheering, with stocks (perversely?) cheering weaker economic news in the interest of easier monetary policy.

As a preface to this week’s report, I want to remind readers that for the past two years we have been tactically recommending that investors keep their overall U.S. equity exposure neutral (or in line) with their long-term strategic allocations; but to overweight U.S. large cap stocks and underweight U.S. small cap stocks.The past 18 months or so have kept stock market riders on the roller coaster. Each successive high in the S&P 500 has been slightly higher than the prior high, but with limited headway made overall, as you can see in the chart below. The latest new high for the S&P, as well as for the Dow Jones Industrial Average (Dow), crossed another pair of round number thresholds—3000 and 27,000, respectively (the NASDAQ crossed 8,000 last month). As for the limited headway, the S&P is less than 5% above its January 2018 high.

Is This the Real Breakout?

Source: Charles Schwab, Bloomberg, as of July 12, 2019.

The story for smaller cap stocks is decidedly less compelling. Since peaking at the end of August last year, each successive peak in the Russell 2000 has been lower, as you can see in the chart below. It remains about 10% below its August 2018 peak. Although we may be getting close to a compelling valuation discount by small caps relative to large caps, for now we are sticking with the recommendation to overweight large caps at the expense of small caps.

Small Caps Lagging Behind

Source: Charles Schwab, Bloomberg, as of July 12, 2019.