A Month We'd Like To Forget
There was no place to hide last month, as the market spiraled to its biggest one-month losses of the year. The safest haven was large-cap growth, which was down 3.8%. The least safe, among the major indices, was the Nasdaq, losing a startling 6.9% for the month. In fact, the Nasdaq was down approximately 10% before rallying in the last few days of the month.
In general, during November, the smaller stocks fared the worst, with all components of small-caps and micro-caps down between 7 and 9%. Growth did better than value, just as it has done throughout most of the past 12 months, but not by much.
Considering the short-term, we had a positive, robust month in October followed by an extraordinarily broad decline in November, so it is difficult to say where things may go next. A longer-term perspective paints a different picture, however. For the year, large-cap growth continues to be in the black, and the Nasdaq solidly positive with a 10% gain. Hence, we might have a positive year-end for large-cap techs.
Right now, the market seems to favor stocks with solid earnings growth, especially those with better cash flow growth than earnings growth. For the first time in many months, analysts' change (revisions of EPS estimates by analysts) was a very important factor, both among stocks that were significantly up and stocks that were significantly down. GARP stocks showed quite decent returns for the month and remain the sole bastion of value investors. Finally, price momentum has often been the prime mover, particularly among large-cap stocks.
You might want to resist the temptation to begin bargain hunting in the financial sector (though that time will come). Financial stocks have rallied a bit over the last couple of days, after being pushed much lower in November by the continuing saga of the subprime mortgage market. But such rallies have happened three times before, and after each rally the financials have gone lower than the previous low. We would not be surprised if they fall yet another 10 to 20 percent. Hopefully, we are wrong.
Let's look for a better market in 2008! Have a happy holiday!
David Brown
Chief Market Strategist