If the bullish scenario plays out this week, flows are likely to be tilted more so to North America ...
12/20/2007 12:00 am EST
December 20, 2007
If 2007 was a person, he or she would be suffering from bipolar disorder: world markets hit new highs in July, only to suffer a gut-wrenching correction-or maybe worse-in the second half.
But this column helped investors steer through the twists and turns calmly and profitably.
We correctly predicted two major selloffs in China and one in the US, twice said that oil prices were heading higher, warned about the subprime mortgage crisis months in advance, and advised investors to shed risky assets before the summer's credit crunch began. We also got a couple of things wrong, of course, as we'll spell out in this year-end recap.
Our most significant call identified a sea change we saw coming in the US markets. On March 1 we said that for the last six years, value stocks had easily beaten growth stocks and small- and mid-cap stocks way outperformed their larger rivals. We laid out the reasons why the tide was about to turn, that large blue-chip growth stocks would now have their day-months before it became the conventional wisdom on Wall Street.
Let's see how they've done.
Since March 1, the large-cap Russell 1000 Growth index has gained nearly 10%, while the Russell 2000 value has lost about that much and the Russell MidCap Value index is off nearly 6%. I think this trend will continue for at least a couple of years, particularly as the economy slows.
In that same column, and again on June 21, just before the summer's financial hurricane hit, we said that investors should take profits in some other high-flying asset classes-not only smaller stocks but also real estate investment trusts (REITs) and high-yield bonds.
Since March 1, the FTSE NAREIT US Real Estate index has fallen a painful 18% and the spread between high-yield bonds and Treasuries has widened from a razor-thin two percentage points in June to over five percentage points now, as investors threw riskier assets overboard.
We also warned investors, twice, about the mania in mainland China's stock market. On February 19 we wrote, "The Chinese market is showing all the signs of a classic bubble." The following week, the Shanghai Composite index tumbled 9%, triggering a selloff in markets around the globe. But it then proceeded to double in value, to top 6,000.
That was about when we wrote another cautionary column about Chinese stocks.
On October 18 we called China "the mother of all manias," pointing out that the Shanghai market had experienced "the most parabolic rise of any major market in modern times."
This time I think we nailed it. As of Wednesday, the Shanghai exchange was below 5,000-nearly 20% below its mid-October peak. I think it will go still lower in what may be the beginning of a new bear market in mainland Chinese stocks.
What goes up must come down, as they say.
We also helped investors keep their heads in the midst of market turmoil. On March 22 and again on June 7 we said the markets would snap back nicely from short selloffs. They subsequently went on to hit all-time highs. But on July 26 we wrote that we were on the verge of a genuine correction. One actually began that very day, driving the Dow Jones Industrial Average and Standard & Poor's 500 down by the textbook 10% before they eventually moved back up to new highs.
We also were on the money in our assessment of the energy markets. On April 5 when crude oil was changing hands at $64 a barrel, we laid out the case for higher energy prices. "Demand for oil will only keep growing while added production, even aided by new technology, won't be able to take up the slack," we wrote. "That's why oil prices are likely to move higher in the coming months and beyond."
When crude prices hit $78 by midsummer, we made an even bolder prediction. On July 19 we wrote: "How high can they go? How about $100 oil and $4 gas?" We got within a drop of $100-around $99-so I'm declaring victory on that one. And although gasoline never got much above $3.00 a gallon, I think it will eventually reach $4.00 while crude will easily scale the $100 barrier in the future, barring a serious recession.
We also got a couple of things wrong-or maybe we were too early. As we said earlier, the Shanghai market doubled after our first cautionary column, and since then we also have been urging readers to lighten up on emerging markets in general. Not yet: emerging markets like Brazil, India, and China have trounced the performance of developed markets like the US this year (one emerging markets index ETF is up 34% since March 1), though I remain convinced this party is almost over, especially in an increasingly risk-averse world.
And we were far too sanguine about the US dollar. On August 2 we wrote: "Unless you believe that the US is in irreversible decline-which I don't-sooner or later the dollar will reverse course and head upward again." The dollar proceeded to weaken even more over the ensuing months.
We revisited the subject on December 6 when we said the dollar looked "way oversold." It has strengthened a bit since then, and may be in a technical rebound now. But until other major central banks follow the Federal Reserve in cutting rates, I believe it will be difficult for the greenback to mount a sustained recovery.
Officially the jury's still out on our gutsiest call. In the depth of this summer's financial crisis, the week after the Federal Reserve cut the discount rate, we wrote the following on August 23 "I'm going to take a deep, deep breath and say that the worst of this summer's financial panic is over."
Although I hedged that statement a dozen different ways and technically it's probably true (liquidity has indeed returned to some markets), clearly summer's 24-hour virus has morphed into a chronic illness. The long-awaited credit crunch has hit hard and fear is everywhere.
The indexes did rally to new highs after I said "this may actually be a good time to put some money to work in the markets-and I mean some money, a small amount that you can afford to lose." But they've since done a round trip and now rest precariously near support levels.
I believe stocks will eventually rally again and the economy will narrowly avoid recession. But I'm a much more cautious bull now than I was then, and risks are higher. Still, despite some mistakes (and, of course, nobody's perfect), I'll take a year like this any time. Who knows what 2008 will bring?
Happy holidays and a healthy new year to you and your loved ones! Top Pros' Top Picks and our weekly commentary returns after the new year.
Comments? Please E-mail us at TopProsTopPicks@InterShow.com
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are not necessarily those of InterShow.
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