Investors are becoming increasingly impatient, even as the Federal Reserve (Fed) doubled down on patience at its March meeting. Policymakers signaled a complete pause in policy in a nod to slowing growth and global uncertainty, while Fed Chair Jerome Powell’s praise of domestic economic fundamentals rang hollow for financial markets. Recession concerns intensified as the 10-year Treasury yield dropped through the end of the week, briefly falling below the 3-month yield on March 22 for the first time since 2007.

Yield curve inversion (or long-term rates falling below short-term rates) can be an ominous signal for the economy

Risk-reward trade-off in stocks has become less attractive following recent gains. Stocks have had quite a run this year, with the S&P 500 Index up 12% as of March 22, 2019, and 19% since the December 24 lows [Figure 1]. The index now sits just 5% below its record high set on September 20, 2018, and 7% from our year end 2019 fair value S&P 500 target of 3,000. Given this move in stocks, coupled with a slightly weaker economic and corporate profit outlook, we believe it is prudent to readjust domestic equity allocations back to market weight.

Macro Outlook Less Certain

This change in asset allocation is

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.

Five Reasons to Favor Large Caps Over Small

We favor large cap stocks over small p

A disappointing February jobs report, released March 8, has increased concerns about a slowing U.S. economy among some market participants. However, we believe the report did little to change the overall economic picture. In fact, job growth and modestly rising wages remain strengths of the current economy and continue to support consumer activity. The economy added 20,000 jobs in February, the slowest pace of growth since September 2017. While that level of gains would be a concern if it were to continue, it comes against a backdrop of robust jobs gains the prior two months, and looking back a year, annual job growth remains well above the c