A Stuttered Sprint Into 2007


by John Whitefoot - Date: 2007-03-13 - Word Count: 546 Share This!

Open up your wallets, a new year of investing has officially begun. Stocks opened markedly higher in the first session of 2007 as investors cheered news that Home Depot Inc's CEO resigned after years of lackluster performance, and that the holiday shopping season had been stronger than expected.

On Wednesday the DOW Jones touched an all-time intra-day high of 12,580.35. Stocks finished the day mixed after the latest Federal Reserve minutes showed worries about inflation and the scale of the housing sector pullback.

Fortunately, the Fed's minutes date from December 12. Unfortunately, investors were looking for some fresh news, and instead the release of the minutes sapped strength from the market on a day that had seen triple digit gains.

For the most part, investors of every ilk are pretty bullish about 2007. Unlike last year, when fears over global imbalances, energy costs and rising inflation made most commentators sound a note of caution, this year, most seem to be surprised that we made it through 2006 intact - and see no reason why the current bull market shouldn't continue.

One Wall Street economist said Wednesday's pullback was overblown given recent data.

"It doesn't make a lot of sense to react to something that is three weeks old and doesn't incorporate the data that we got between now and then. The manufacturing data today suggests things were OK as we headed into the end of the year," he said.

Which makes total sense. Even though most economic forecasters are quick to point out that 'past performance is no clear indicator of future performance' (Dr. Phil of course states the opposite - who does one believe?), they almost all rely exclusively on very recent history to inform their opinions of what's likely to happen in the coming year.

And what does our most recent economic history tell us? It tells us that 2007 will be a good year for small-cap and penny stocks. Domestically, small caps beat large caps, with the S&P Small Cap 600 advancing 15.1%; the Penny Stock Index advanced 9.3% since August (when the Index first began monitoring penny stocks).

Said another economic strategist, "The 1990s belonged to the large-caps, this decade, thus far, belongs to smaller companies,"

Still, even if large caps do outperform their penny stock peers, that doesn't mean penny stocks will not have an exceptionally strong year. Large cap gains do not sap strength on the backs of penny stocks.

If anything, blue-chip optimism often means investors are more willing to invest in smaller, riskier stocks. Which isn't a bad idea, small caps stocks defied the experts once again in 2006 and outperformed their large cap peers; for the seventh year in a row.

So while I cannot - with Magic 8-Ball certainty - predict the markets in 2007, I think things look good for penny stock investors. The current bull market has entered its 6th year and there's no reason to think it will not continue.

As one economic advisor noted, despite going through a mid-cycle slowdown, there is no reason to think we are heading into a recession. With interest rates and gas prices stable, consumers should continue to spend and send the economy higher.

While many economists think U.S. blue chips will see returns of about 8%, our recent history shows us that penny stocks should, once again, outshine their mid and larger-cap peers.


Related Tags: stocks, investing, stock market, dow, investors, penny stocks, penny stock, dow jones, wall street

A seasoned investor with a keen interest in international business and current affairs, John Whitefoot has been working alongside Peter Leeds for the last several years. With over ten years experience in the investing community, Whitefoot is devoted to uncovering the news, trends and ideas that shape penny stocks on a daily basis.

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