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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.

Pessimism has rapidly infiltrated Main Street’s outlook, according to the Federal Reserve’s (Fed) latest edition of the Beige Book. By our measure, sentiment in the March 6 Beige Book, a qualitative assessment of the domestic economy and each of the 12 Fed districts, fell to its lowest point in seven years [Figure 1]. On the surface, the Beige Book’s negative tone is striking compared to recent versions, but context around key words is especially important in this edition.

The bull market will celebrate its tenth birthday on March 9, 2019. During that period, the S&P 500 Index has increased more than fourfold in value, producing a total return of 410% (17.7% annualized) while rising 314% in price. Concerns over the global economy, along with a potential policy mistake by the Federal Reserve (Fed) and the trade dispute with China, all have many wondering just how much the longest bull market ever could have left in the tank. This week, we’ll show why this bull market is indeed alive and well and could make it to 11 next year.

Investors are sifting through a deluge of backlogged data after a historic U.S. government shutdown. As data have caught up, many reports have missed consensus estimates, stoking fears that Wall Street may be overlooking a slowdown in the U.S. economy [Figure 1]. To help allay those fears, we’re addressing some questions we’ve received about the economic landscape recently, and provide our thoughts on what to look for in gauging economic health.

The rally continues, as the S&P 500 Index gained for the seventh week out of the past eight, while the Dow Jones Industrial Average, Russell 2000 Index, and Nasdaq all closed higher for the eighth consecutive week. Sparking the rally this week were Washington striking a deal to avoid another government shutdown and hopes that President Trump might push back the March 1 deadline on higher tariffs on Chinese goods.

Deteriorating confidence over the last several months has soured the economic landscape. About four months ago, the Conference Board’s Consumer Confidence Index reached an 18-year high. Since then, the gauge has dropped about 18 points, its biggest three-month decline since 2011. Sentiment’s swift decline has caused some to wonder if a drop in confidence could be self-fulfilling, as lower confidence could weigh on consumer spending, and consequently, on output. Historical data show that the U.S. economy has entered a recession an average of 19 months after a peak in consumer confidence, and a drop in sentiment has been a warning sign for past economic cycles [Figure 1].