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July 1, 2011, 3:07 p.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Forget all those mid-year scorecards that tell us how stocks have done over the last six months.
The far more important investment scorecard shows where we are today relative to the Oct. 9, 2007, stock market high.
The picture painted by the major stock market averages, of course, is rather grim. As of Thursday's close, the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA +1.36% is around 12% below its all-time high of 14,165, and the S&P 500 index /quotes/zigman/3870025 SPX +1.44% is nearly 16% below its October 2007 high of 1,565.
MarketWatch's Mark Hulbert checks the stock market scoreboard since the highs of October 2007. If you invested in small- and mid-cap stocks, you are doing well. AP Photo/Richard Drew, file
A far different picture emerges when we focus on other parts of the stock market, however. It turns out, in fact, that the majority of individual stocks are now above where they were in October 2007. The same goes for the investment advisors tracked by the Hulbert Financial Digest (HFD), and is close to being true for domestic-equity mutual funds.
In other words, if we're not there already, we're quickly approaching the time when investors will be in the minority if they are below water relative to their October 2007 levels.
Why do the major benchmarks paint such an incomplete (if not outright distorting) picture? Because they represent the largest cap stocks, and that sector has been one of the poorest performers over the last several years.
Consider the performance of the various benchmarks calculated by Wilshire Associates, the index provider. From Oct. 9, 2007, the date of the stock market's all-time high, through this past Wednesday, the Wilshire U.S. Large-Cap Index lost more than 8%. In contrast, Wilshire's U.S. Mid-Cap Index is more than 11% higher, and the U.S. Small-Cap Index is more than 10% higher.
This bifurcated market is perhaps even better illustrated by focusing on two other Wilshire indices. Consider first the Wilshire 5000 index, which represents the combined value of all publicly traded stocks in the U.S. It is nearly 7% below its October 2007 high, after taking dividends into account. However, if you take away the 500 largest stocks, which is what the Wilshire 4500 index represents, it would be 6.1% higher.
The relatively strong showing of non-large-cap stocks is one of the contributing factors for why a majority of investment newsletter portfolios are ahead of where they stood 3-1/2 years ago. Newsletter editors, more than most other members of the investment advisory industry, tend to focus on smaller-cap issues.
The HFD has performance data back to October 2007 for 402 investment newsletter model portfolios. Of them, 225 "” or 56% "” were worth more at the end of May than they were at the market's all-time high.
The percentage of domestic-equity mutual funds that are above water, while also large, is not as high as it is for investment newsletters. But that's understandable, since most mutual funds (because of liquidity concerns) tend to avoid the smallest-cap issues.
According to a report produced earlier this week by Lipper (a Thomson Reuters company), 45% of the domestic-equity funds for which they have data back to October 2007 were, as of the end of May, ahead of where they were on the date of the stock market's all-time high.
One important lesson to draw from all this: Bear markets are not monolithic affairs "” even ones as severe as the one that lasted from October 2007 to March 2009. Keep that in mind the next time we do slip into another bear market, so that you won't let generalized bear market fear cause you to not even try finding those particular areas of the market that might buck the overall trend.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
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