INVESTING: It’s early, but trends for ’07 are unfolding as expected

The trends of 2007 possibly have been established, and so far it looks as if these trends are playing out close to the script I wrote a month ago.

At the beginning of the year, I expected big-cap growth stocks, especially Americanbased companies, to perform the best this year. I thought small caps would continue their slowing momentum against other assets, and that foreign markets, both emerging and developed, would not quite live up to the numbers they posted last year. One last thing I believed would happen this year is a steady increase in volatility.

While those estimates are broad and exceptions can be found throughout, for the most part, the markets have followed the outline pretty well. At the end of the first month, large-cap American tech stocks are near the top of the heap, with a 1.3-percent return. Developed overseas markets are flat on the year, and emerging markets are mostly down. Volatility clearly is increasing, as those same tech stocks that are up were up 4 percent for the year a few weeks ago.

I don’t believe in the January barometer. Its predictive value is about 60 percent. I guess higher-risk players might put some stock in it, but those odds aren’t good enough for me. It is far more effective to look at the month in the larger context of things, using stats from a lot of other sources to figure out the intermediate-term direction of the market. You see, in January 2000, when the S&P 500 posted a positive performance for the month, it would have been a disaster to assume the rest of the year was going to follow. With only a slight uptick in performance so far for the S&P, it probably won’t be a disaster to assume the year will end up the same, but it might cause your portfolio to suffer a little.

The underpinnings of the market behind the so-far listless returns are more positive than what appears on the surface. While the major averages could suffer a 3- to 5-percent pullback at any time, gains should be forthcoming over the next five months, and these gains could be substantial. I am not positioned for nor expecting the substantial part, but it could happen.

As for the exceptions to my predictions from earlier this year, there were a few worth talking about.

I thought small caps would continue to slowly fall behind and they have, but I also felt mid-caps wouldn’t be worth looking at, either. Well, the mid-caps are the top-performing major index in the world right now, with a year-to-date gain of more than 2 percent. It will be a difficult trend to try to follow, though, because the performance has come entirely from the bigger of the mid-caps, and that from the value sector.

But there might be a clue there for the rest of the year.

Of all the predictions I am talking about, I have the highest confidence in the rising volatility part. The ride to higher returns will get a little rockier this year than the last few months. Corrections will come a little more frequently and be a little bit deeper. But as I have been saying since September, it remains a buy-on-the-dip environment; just expect to wait a little longer for the dip to be complete.