Hennion & Walsh Trending

I am sure that the title of this post will capture the attention of many weary investors following the historic meltdown of 2008. Unfortunately, there are no quick fixes in the world of investing, nobody has a crystal ball, and this is not the market environment where one should be looking to take on unnecessary concentration risk (i.e. having a significant portion of your portfolio in one asset class, company or sector) or engage in the often dangerous practice of trying to pick the hot stock or sector.

There are areas of the market, however, that I believe are worthy of consideration this year within a diversified portfolio that is oriented towards an investor’s objectives, investment timeframe and tolerance for risk. Please remember that while diversification, and asset allocation for that matter, cannot guarantee a profit or protect against a loss, when implemented properly, the two investment strategies can help to protect principal in down markets while also helping portfolio performance in up markets. One such area that our research is pointing to for the investment year of 2009 is the Small-Cap asset class.

A Small-Cap stock is typically defined as the stock of a company with a market capitalization between $250 million and $2 billion. The stocks of companies with a market capitalization below $250 million are generally referred to as Micro-Cap stocks. Small-Cap stocks have traditionally led bear market –> bull market recovery efforts. I believe that one of the primary reasons for this occurrence is that 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. In fact, Claymore Securities, in the paper entitled, “Recessions and the Financial Markets: Putting the Market Cycle into Perspective,” offered this data as evidence of Small-Cap historical dominance during the six-twelve recovery months following the last four recessions starting in 1980.

Average Returns by Market-Cap Following the Last Four Recessions 

Source: Claymore Securities. Data for recession dates are 1/80-7/80, 7/81-11/82, 7/90-3/91 and 3/01-11/01. Past performance is not an indication of future performance.Some glimmers of hope can be found in this regard already seeing that Small-Cap outperformed Mid-Cap and Large-Cap in 2008. 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, I would suggest a significant weighting in Small, and Mid-Cap asset classes, for 2009 is worthy of strong consideration.