Wednesday, February 28, 2007

Owtch, Budby.

(inside joke)

I don't often write Market Commentary here, but yesterday was a bad, bad day for the world stock markets. China started it off, quickly followed by other Asian and European markets, but our own Alan Greenspan had a lot to do with it too. On Monday, Greenspan said that our current economic cycle is nearing and end, and that a recession was "possible" late in 2007. There is a lot of truth in that, because most cycles tend to last about 5 years (and *SHOCK* correspond to a shift in power in our government- the Dem's seem to benefit from the Rep's economic plans which take years to see results) Some have speculated that his comment on Monday spurred sell off's world-wide on Tuesday- including here in the States. The Dow suffered a HUGE loss yesterday, down 416 points- the worst day since re-opening after 9/11.

Our small-mid cap markets have been going gang-busters for several years now, consistently outperforming the larger growth stocks. Since 2000, small-mid cap value companies have blown away their larger, more established blue chip competition. This tells me that small pockets of the US economy are supporting the masses. Yesterday's selloff hit all market caps- with each of the major indexes falling about 3.3%. I would have rather seen the NASDAQ experience a greater loss than the Dow, but that didn't happen.

The Dow stocks are larger, more established companies and are typically bought to stablize your portfolio. Less experienced investors like them for their slow, stead growth- it lets them get their feet wet in the market without taking huge risks. More experienced investors like them for the same reason- but they use them to balance out their more aggressive investments. Russell 2000 stocks are smaller, emerging companies- the heartbeat of American ingenuity. Because they are smaller, they tend to move up and down more quickly (just as a toddler can outrun a parent, smaller companies can move like a bugger!). Investors like the smaller companies because of the quick hits, but less experienced investors tend to dump them at the first sign of trouble, causing them to plunge even quicker. Keep in mind that these stocks do move quickly- both up AND down. Larger stocks move a little slower.

The overall slow economic growth of our country has worried many analysts for several months now. In order for our country to increase it's economic strength, we need the larger, more established companies to experience steady growth, AND we need the smaller, more dynamic companies to experience growth spurts, allowing them to funnel more cash back into R&D. The past 5 or 6 years have seen the smaller company spurts, but we haven't really seen a lot of large cap consistency. The S&P 500 Growth has been amongst the lowest performing equity indexes since 2000, whereas the Russell 2000 Value has been amongst the highest.

A self-correcting market is always more preferable than government influence, which is what we are seeing now. Since the asian markets rebounded today, I am speculating that our markets will too. HOWEVER. This sell-off is not complete. I would look for mixed US stock market over the next few months. Think of it as a buying opportunity, because we will recover, and we will get back on the straight, slightly uphill road our economy usually drives upon.


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