The Long Road: Bears Go Home (For Now)

June 06, 2008


Between styles, spurts by small-cap value stocks typically run longer than their growth counterparts. In each 10-year period starting in 1958, small-cap value outperformed small-cap growth. But that simply reflects value's long-time dominance over growth - across all cap sizes - more than anything.

So is the market setting up for another whiplash? Or, could it be that the bears represent a bunch of noise?

On Friday, the naysayers got some more fuel to feed their fire. Unemployment grew in May enough to make it the biggest one-month jump since 1986.

Keep in mind that a 5.5% level remains historically on the low side. Another contrarian viewpoint is that while the credit crisis is by no means resolved, companies aren't completely cut off from raising capital. And fears that world markets would be brought down by the meltdown that began with mortgages hasn't materialized to any huge extent.

Take a concentrated ETF such as the iShares S&P Global Financials Index (NYSE Arca: IXG). It has rebounded some 4.7% in the past three months. That might not seem like much, but consider it's still down more than 21% in the past 12 months.

Optimists are also pointing to November's presidential election. Despite what some pundits are saying on cable television, a victory by Barack Obama doesn't necessarily spell doom and gloom for stocks. In fact, a Journal of Finance study found that since 1927, U.S. stocks have performed better with a Democratic president than a Republican.

For those joining the Federal Reserve in putting inflation at the top of their red-flag list, a case can be made that conditions remain at least somewhat under control since wage growth remains in check.

By Definition 

Then there's the little fact that the U.S. economy hasn't even hit one period of negative growth yet. First-quarter gross national product was actually revised up. Critics complain that those economic measures aren't accurate. Real GDP, they say, shows we're already in a recession.

But isn't that sort of changing definitions of what a recession really is - in midstream?

"We've entered into a state of recession in certain sectors - mainly housing and financials," Slusiewicz said. "But even the bears can't claim recessionary conditions are widespread at this point. Clearly, there are still pockets of growth in the U.S. economy."

So if you buy that the markets are right and better times are ahead, which is the best place to park your money right now?

"Small- and mid-caps are the place to be at this point," Slusiewicz said. "But we're not making any major changes at this stage in the cycle."

His core positions with small company stocks remain the MidCap SPDRs (AMEX: MDY) and the small-cap growth IJT. Slusiewicz also prefers the Rydex S&P Equal Weight ETF (AMEX: RSP) rather than the traditional market-cap-weighted SPY. "We like to spread our risks in large-caps by going with an equally weighted index," he said.

But both Anderson and Slusiewicz emphasize that while they're still cautiously optimistic, markets remain extremely cloudy.

"People need to remember that while the second quarter is shaping up as an improvement in market conditions," Anderson said, "it's a rebound out of nearly complete chaos in the first quarter."

Slusiewicz agrees. "This market's still threading the needle on stagflation," he said. "But what I'm telling my clients is that it's still too early to be overly bearish. We're sticking with our core positions."


Murray Coleman is managing editor at He can be reached at [email protected].




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