Signals of an Economic Recovery
Better days are coming! I spotted this article buried in the business section of the New York Times:
Have you seen how small-capitalization stocks have been performing lately?
Despite all the bad news surrounding record-high oil prices, mounting job losses, and continuing troubles in housing, the Russell 2000 index of small stocks has soared 12.7 percent since mid-March. By comparison, the Standard & Poor’s 500 index of large stocks is up by a more modest 3.5 percent.
For investors, this surprising situation raises an important question: Are small stocks signaling that the worst of the economic storm is behind us?
Historically, a small-stock rally during an economic slowdown has often foreshadowed better times ahead. Ned Davis Research of Venice, Fla., studied economic downturns since the end of World War II and found that large-cap stocks tended to lose their momentum to small stocks six months after the start of an official recession. The typical recession has lasted about 10 months, so these turns often take place during the economic slump — not after one.
To be sure, no official recession has yet been declared this time around. But if, as some economists believe, a recession started in December, it wouldn’t be surprising that small stocks have begun to excel.
The recent surge in small-cap stocks “fits with many other economic and stock market indicators suggesting recovery,” said James W. Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. He points out that not only are small stocks generally doing well, but also that the most economically sensitive sectors of the small-cap universe have performed best of late.
[Targets for the legal profession include]
- Energy stocks in the S.& P. 600 small-stock index, which are up more than 40 percent since the start of April
- The technology sector, up more than 9 percent
- Industrial stocks, up more than 8 percent.
Small-stock earnings have held up surprisingly well during this slowdown. In the first quarter, as profits for companies in the S.& P. 500 sank 17 percent versus the same period a year earlier, earnings for the S.& P. 600 small-stock index fell less than 9 percent, according to Merrill Lynch.
And Wall Street analysts are forecasting that S.& P. 600 earnings this year will grow just as fast as large-cap stock profits — by around 8 percent, according to S.& P. “On average, earnings for the companies we own are coming through reasonably well,” Mr. Stewart said.
