It's Not the Thirties or Seventies

05/13/2008 12:00 am EST


Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of the Independent Adviser for Vanguard Investors, says that despite the weak economy, some segments of the market remain surprisingly healthy.

We may not have officially confirmed a recession, but it sure does feel like one, as companies have cut back on hiring or started firing, retail sales have declined, housing prices have fallen, and loans have gotten harder to come by. Rising credit card delinquencies and, yes, higher rates of defaulting mortgages are not exactly signs of a robust environment.

Yet, for all the negatives, this is definitely not the Depression of the 1930s or the stagflation of the 1970s. As some first-quarter earnings reports made abundantly clear, American businesses can be divided into two camps-those that are growing their businesses, particularly through exports, and those that are not. They aren't all falling off a cliff.

What's become clear in the latest round of earnings reports is that the doom and gloom that permeated Wall Street just a few weeks ago was a bit off base, as companies from Google to IBM to Honeywell International to Caterpillar surprised on the up side with strong gains in overseas business spurred in part by the weak greenback.

Yes, General Electric missed big time, but it was its financial division that caused the damage. (Why am I not surprised?) Other financials, like Citigroup and JPMorgan Chase, actually did better than had been expected and they rallied, too.

For all the sturm und drang in the marketplace, only small-cap stocks actually closed briefly in bear market territory, which is commonly defined as a decline of 20% or more from the high. Mid caps, which actually peaked last summer, didn't fall even that far, though they had more time to do it, while large-cap indexes dropped about 18% or so.

The markets have already clawed their way back a bit, particularly among large caps. In part, you can credit the strong reports of increased exports catalyzed by the declining value of the dollar-something I've been talking to you about for some time. The fact that smaller companies, which often don't have the kind of global presence that large companies do, have not rebounded as quickly is, I believe, a harbinger of what's in store for much of the rest of 2008; though a stronger-than-expected rebound in US consumption could be just what those smaller stocks need to catch back up.

One thing you need to remember about this stock market is that a lot of investors are still sitting on the sidelines with lots of cash-several billion dollars in fact-waiting to jump back in. You and I are already in, and have ridden the recent 1,000-point gain in the Dow from its March low while others sat and watched. Remember, it's "time in the market, not market timing" that makes money in the long run.

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