Good News and Bad News

Pieces of good news do come along every once in a while to lift investors’ spirits. But these items are often shadowed by bad news. Consider the following from the past week or so…

Good news: Small-cap stocks — at least those outside the U.S. — outperformed large-cap stocks last month. The Russell Global ex-U.S. Small Cap Index was up 6.1% in January while Russell’s large cap index dropped 8.9%. Why is this good? Small stocks are often “early cyclical stocks” and, Rob Balkema, a Russell Investments analyst says, “the leaders off the bottom of a market downturn typically are early cyclical stocks.”

Bad news: In the U.S., large caps beat out small caps in January. Furthermore, the S&P 500, the broad U.S. index, dropped 9% in January. The so-called “January Barometer” says the S&P’s performance in January is a good guide to its performance for the whole year. According to the Stock Trader’s Almanac: “The indicator has registered only five major errors since 1950 for a 91.4% accuracy rate.”

Good news: The U.S. Senate confirmed Timothy Geithner as Treasury Secretary, meaning the Obama administration can get serious about ending the financial crisis. Enrique Chang, chief investment officer at American Century Investments, sums up the optimists’ case:

With each passing day, the challenges we face are running their course and government countermeasures are gaining traction, bringing us closer to the market and economic turning points we are anticipating and preparing for.

Bad news: General frustration that it’s taking too long, and worries governments aren’t doing enough. DB economics team, led by Peter Hooper writes:

Unfortunately, progress toward implementing rescue plans falls well short of the ideal on a global scale. The US may come closest, but even there the opposition of voters runs high and the pending legislation could be weakened further in response to political opposition. Overall, we see the risks of insufficient action on the financial front rising, and with them the risks that the global economy will be mired in a prolonged period of sluggish growth.

Good news: M&A dealmaking bounced back in January, when global investment banking volume was higher than in any month since September, according to TRI. If deals are happening, that’s one sign of optimism from the world’s bankers, executives and corporate boards.

Bad news: Global investment banking volume in January of $705.8 billion still was 22.4% below a year ago. Also, $64.6 billion of that volume came from the proposed acquisition of Wyeth (WYE) by Pfizer (PFE). That deal may not be representative of more deals to come.

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