Since mid-February 2019, the price ratio between small cap and large cap equities (RUT/SPY as a proxy) hit its 200-day moving average and failed to breakthrough, and in turn, has been falling since. In addition, its Smart Money Indicator reading shows it is 1.84, well of its highs of 1.98 as seen earlier in the year, indicating that this trend has some legs to stand on.
Thus, this lends credence to the fact that global investors have been rotating out of small cap stocks and into large cap stocks.
We believe that this trend is due to two reasons:
1) Improving Trade Deal Prospects Between the US and China - As talks of a trade deal continue to progress well between the two nations, investors have begun to move money back into large cap sectors and names that will greatly benefit from the reduction, or even removal, of trade barriers between the US and China. This can been in the fact that trade sensitive sectors such as technology (up 16.67%) and industrials (14.44%) have been some of the top performing sectors year to date.
2) Slowing Global Economy - With the current economic expansion growing tired and weary, from a factor perspective, investors have been moving money out of riskier segments of the equity market and into “safer” areas such as large cap stocks, companies with stable growth, value stocks, and firms with lower betas in relation to the general market. Investors have realized, and rightfully so, that though this recent run in the markets has been solid, the macroeconomic backdrop continues to be an area of concern.
Overall, though we think that small caps still have some to run, investors should take heed over the fact that money is moving out of this segment of the equity market and into large cap equities. Furthermore investors should be cautious if this trend continues.