Market Capitalization: Large / Small

The Fed's decision to scale back intended interest rate hikes reflects economic reality.

Small caps have enjoyed a modest oversold bounce relative to large caps, but the latest NFIB survey of the small business sector warns that these gains are likely to fully reverse, and more. The tightening in domestic monetary conditions appears to have begun taking a toll on both small business confidence, and access to funding. That is noteworthy, because history shows that small caps underperform large caps when credit tightens (top panel), given that the former rely more heavily on the banking sector for financing than do large caps. Meanwhile, optimism about the economy has tanked, perhaps reflecting the intensification in deflation pressures: the number of companies reporting price increases has plunged. While labor compensation also eased, suggesting increasing overall labor market slack, it was not enough to offset the loss of pricing power. Our small cap profit margin proxy continues to sink. We reiterate our large cap bias.