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What Areas are Leading This Market Recovery and What Does That T

The S&P 500 Index closed today; March 23, 2009, over 7% higher than the previous day. Many have attributed this particular market rally to the release of Treasury Secretary Geithner’s much-awaited “Toxic Mortgage Plan” while others gave credence to the better-than-expected existing home sales data that was released this morning. Regardless of what caused this particular rally or whether or not this rally is the start of a sustained recovery, I believe that it is interesting to look at those areas of the market that were at the forefront of not only today’s rally but of 2009’s year-to-date performance thus far.

I often find it valuable to look at the Exchange-Traded Fund (“ETF”) marketplace to gain insights into different areas of the market (i.e. asset classes, geographies, sectors, currencies, commodities, etc…). Accordingly, please see the chart of a handful of different ETFs provided below. All data was derived from ThomsonReuters as of the close of business on March 23, 2009. Please remember that past performance is not an indication of future results.

Based on the data displayed in this chart, some interesting observations can be made:

    1. Year-to-date in 2009, Growth is outpacing Value. As a reminder, Value oriented stocks typically have higher dividend yields, low price-to-book ratios and/or low price-to-earnings ratios and tend to trade at a lower price relative to their fundamentals. Growth oriented stocks typically have higher Price-to-Earnings ratios and are associated with companies which are growing earnings and/or revenue faster than their industry or the overall market. This trend towards Growth is certainly encouraging for market recovery efforts. While slow U.S. Growth over the medium term and volatility over the short-medium term is still anticipated, I would suggest that an over-weighting towards Growth versus Value, neutral at worst, as the market continues its recovery efforts seems worthy of consideration for the balance of 2009.
    2. Year-to-date in 2009, and again on March 23, Emerging Market Equities are outperforming their major equity asset class peers. Emerging Markets, which are largely not directly associated with the current credit crisis gripping the developed countries of the world, experienced the largest declines of the major equity asset classes in 2008. This has created very attractive buying opportunities and fundamental values that I have not seen, in some cases, since the Russian Ruble crisis back in 1998.
    3. While lagging Year-to-Date in 2009, Small Caps appeared to mount a charge on March 23rd which is a good sign for the beginning of a potential, sustainable market recovery. Small Cap stocks have traditionally led bear market -> bull market recovery efforts primarily because during bear markets, when economies are usually suffering through a recession, credit often becomes cheaper which allows smaller capitalized companies a more affordable means by which to access the credit markets and advance their often-innovative product offerings. Remember, at some point, a majority of the most widely recognized, blue-chip companies started out as Small-Cap companies that grew into Mid-Cap and Large-Cap companies over some period of time. For these reasons, the catalysts for market recoveries generally come out of the Small-Cap asset class.

 

  • In addition to Gold, baskets of Commodities (similar to the one the underlies the ETF DJP), appear to be outperforming thus far in 2009 which I believe suggests that the market believes that with the forecasted recovery, spurred on by historical levels of spending, will likely come inflation. Inflation, if not controlled, could impede any real and sustained recovery attempts and thus should be accounted for appropriately in your asset allocation strategy.

 

More than anything, all of this should remind investors of the importance of diversification and asset allocation. While past performance cannot guarantee future results and asset allocation cannot ensure a profit or protect against a loss, at Hennion & Walsh, we believe that a diversified portfolio that is re-balanced frequently and constructed in accordance with an investor’s goals, timeframe and tolerance for risk can help to withstand market volatility while also helping to participate in market advances.