A weaker US dollar tends to be a tailwind for large caps; a stronger US dollar tends to be a tailwind for small caps.
In this week’s Market Signals podcast, our Research strategists discuss the recent disappointing jobs numbers, the upcoming Fed decision on interest rates, and why large caps could outperform small caps.
The February employment report showed that only 20,000 jobs were created, which was much less than expected. The LPL strategists speculate that weather could have played a role in the less-than-favorable report, citing the 500,000 jobs created in the previous two months. In their words, “One data point doesn’t make a trend.” They see jobs improving the rest of 2019.
This week the Federal Reserve Bank (Fed) is expected to decide on interest rates. Our strategists don’t expect the Fed to announce any policy changes but note that the market will be looking for clues to potential rate hikes later this year. The strategists are interested to learn what the Fed has to say about the economy. As the global slowdown continues, will the Fed lower Gross Domestic Product (GDP) like Europe did last week?
Small cap stocks, as measured by the Russell 2000 index, had a great start to 2019 but come on the heels of a historically bad fourth quarter. The strategists think the trend is about to change with large cap stocks outperforming small cap stocks the rest of 2019. In the opinion of the LPL strategists, large cap stocks have done better later in the economic cycle when the US Dollar is weak. They could benefit once a trade agreement is in play with China, as large cap stocks sell significantly more overseas.
It has been a great start to 2019 for small caps, but we do see signs that this trend could be slowing. As shown here, the Russell 2000 Index found resistance from its 200 day moving average and on a relative basis versus the S&P 500. We expect large caps to begin to lead small caps here.
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