BY Gil Knight, a fund manager at Govett Mid- and small-cap stocks have outperformed the larger-c...
BY Gil Knight, a fund manager at Govett
Mid- and small-cap stocks have outperformed the larger-cap indices so far this year, as they have for the past several years. We shouldn't forget either that value small-caps have outperformed growth small-caps by a record amount.
Value, historically, has been defined as high dividend yield, low price to book and low P/E ratio. This emphasis on avoidance of risk could be with us longer until some of the great uncertainties about the US economy and business environment are cleared up.
First, the economy is indeed recovering, albeit at a snail's pace. Industrial production, consumer incomes and consumer spending are all going in the right direction. We might even hit or exceed 3% GDP growth for all of 2002.
Housing is still strong, as are furniture sales. The shopping malls are thriving. We expect consumer spending to continue to be upbeat and, hopefully, carry the economy until late in the fourth quarter or early in the first quarter, when corporate capital spending should kick in.
Second, US businesses remain on the positive side in terms of business activity, as shown by the Fed's beige books, although, in many industries such as semiconductors, there has been precious little in terms of positive forward guidance.
Creative/fraudulent accounting has been another negative for the stock market, but the bad news is essentially out, although it is difficult to say whether there will be more disclosures.
The Bush administration is desperately trying to head off Democratic criticism for being too soft on business by announcing its own 'get tough' policy. Bush must forcefully demonstrate to Americans and the world that he really is serious about business.
Finally, we come to the terrorists, whose threats against the US people have been taken seriously, at least to the point of making stock investors very jumpy. The huge rally on 5 July, the shortened trading day after the celebrations of 4 July, appeared to be a relief rally from the lack of any terrorists' attacks. Although many worst-case tragedies could in fact occur, the US public is toughening up and is starting to get used to warnings from the government.
The disconnection between the US economy and the US stock market remains because of the many global uncertainties, including the dollar.
We suspect the dollar could go lower but this does not automatically mean that US stocks will not go up.
The US seems to be in big trouble around the world these days, with a weak stock market, corporate scandals everywhere, enemies at the gate, a declining dollar and a struggling economy.
This reminds me of the 1973/1974 energy crisis, when, in the summer of 1974, the US looked pretty sick.
The 1974 bear market has been eclipsed in longevity by the current bear, but not yet in terms of the decline in the major indexes.
This summer's earning season reports and forward guidance by management will go a long way in determining whether there is much more downside to the US stock market.
Bush getting tough on corporate fraud.
Economy recovering, albeit slowly.
Housing still strong.
Disconnection between economy and markets.
Weaker dollar does not mean stocks will rally.
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