“The Dow is up about 8 percent since mid-July and seems poised to break its all-time closing high set in 2000.
But while the Dow index has performed well of late, the Russell 2000 index – the most-watched index of small-cap stocks – has dropped more than 10 percent since May.”
First of all, the statement above, craftly yet unfairly uses May timeline for Russel2000 but July timeline for Dow. To have a fair comparison, both Dow and Russel2000 are up about 8-10% from their July lows. Both Russel2000 and Dow are in the positive for the year. So the bounce is there across all stocks but considering the upcoming slow down in economy, focus has shifted from small caps to large caps and from growth to value. Small caps are generally more volatile, risky investments than large caps and small caps had outperformed large caps for the last 4 years and naturally there is a change in leadership this year.
Stocks are up simply because there are large group of people who believe that the US will have soft landing, who don’t agree that a recession is going to hit the US and that the slowing housing sector alone is not sufficient to bring a recession with other sectors being strong. They believe that the mid of 2007 will spur another growth cycle as Fed starts to cut rates and these guys are positioning themselves early. Note that there also loads of very smart people with numbers and stats to make their point for the case of soft landing. There are no absolute truths, only interpretations (Nietzsche). We shouldn’t be bewildered as to why the stokcs are behaving against our theory, instead we should be discussing a strategy (diversification, stop losses, hedges, etc) to minimize the losses if market turns to prove that we are wrong.
