Key Points

  • U.S. stocks have made limited headway since January 2018; with much of the choppiness tied to trade-related news.

  • The S&P 500 broke out of its recent range on the upside; but we’ve yet to see any confirmation by small caps or equally-weighted indexes.

  • Sentiment measures reflect the confusion investors are feeling courtesy of the trade war’s impact on short-term market movements.

I’ve been using the tail end of a Shakespeare quote to characterize the U.S. stock market’s behavior over the past 20 months or so: “…full of sound and fury, signifying nothing.” Well, maybe not “nothing,” but not much either.

As you can see in the chart below, although the S&P 500 has broken out on the upside of its recent range, it has made little headway (+3.7%) since it hit its January 2018 high and hasn’t yet broken above its July 2019 high. We headed into 2018 with the theme to our outlook of “it’s getting late” (in reference to the economic cycle); with a conclusion that we were likely to experience more frequent bouts of volatility, but less robust upside performance. Our 2019’s outlook theme was “be prepared.” In keeping with that, we have been recommending investors consider rebalancing more frequently as the market’s swings provide favorable opportunities. That continues to be our recommendation in the context of being tactically “neutral” to U.S. equities.

S&P’s Limited Headway

Source: Charles Schwab, Bloomberg, as of September 6, 2019.

Living large

Within U.S. equities, we continue to recommend an overweight to large caps and an underweight to small caps. As you can see in the first chart below, relative weakness in small caps has been fairly persistent; with the Russell 2000 Index of small caps making a series of lower highs, and remaining well below its August 2018 high. Also reflecting the prevalence of large cap leadership, the Value Line Arithmetic Index (VLA) has also been making lower highs and is well below its August 2018 high, as seen in the second chart below. For those unfamiliar with the VLA, it comprises 1700 stocks—all 500 stocks in the S&P 500 plus the next largest 1200 stocks. But unlike the cap-weighted S&P 500 the VLA equally weights every stock.

Small Caps’ Lower Highs

Source: Charles Schwab, Bloomberg, as of September 6, 2019.

Value Line’s Lower Highs

Source: Charles Schwab, Bloomberg, as of September 6, 2019.