by   |   May 23, 2014   |   on ,

Is 2014′s market a repeat of 2007?

Comparing 2014 to 2007 is about as ludicrous as it gets.

From the perspective of some market participants, stocks are sitting on a precipice about to collapse, just like what took place in the summer of 2007.

Don’t be ridiculous, I say!

Nothing about the current environment is remotely similar to 2007, except perhaps for the age of the bull run — and age itself is not an indicator of pending doom.

Hugh Johnson of Hugh Johnson Advisors is worried. I think it’s safe to say that you can play his advice in a contrarian way and do quite well for yourself.

The basis for his concern can be summed up in one word: divergence.

In 2007, small-cap stocks began a retreat in the summer, which foretold a wider crash that took place in 2008.

In 2014 we are seeing small-cap stocks correcting while the broader market powers forward,   including big moves to the upside in traditional defensive stocks like utilities and consumer staples.

On the surface, Johnson’s observations are correct . . .  but they are superficial.

The market is diverging for one reason and one reason only: the weather.

In essence, the economy stumbled in the first quarter because half of the country was frozen solid. As such, we experienced what can be viewed as a mini-recession within a larger economic expansion.

The flaw in Johnson’s argument is that in 2007 the economy was overheated. He even references Citigroup and quotes from its CEO at the time that it would continue its crazy lending ways because the music was still playing.

The question I have for Mr. Johnson is this:  Where is the similarly crazy behavior today? The economy can be accused of being many things, but overheated is not one of them. We are far from it.

The mistake Johnson makes is simply looking at the market reaction to the mini-recession and making broader conclusions.

Johnson says don’t fight the tape. The masses are rotating out of risky positions and therefore you should do the same.

I say do the opposite.

When was the last time the masses were able to accurately predict the future? Indeed, 2007 the masses — or at least those moving out of small-cap stocks in 2007 — got it right as 2008 was a disaster, but that was the exception, not the rule.

Typically the masses are reactionary and emotional. Because of that, irrationality sets in and for the most part the masses should be ignored.

Johnson makes the suggestion that investors should reduce exposure to consumer, technology and industrial sectors.

The consumer names would be the ones that jump out at me.

When mini-recessions end it will be the consumer that leads the way. Spending there will power these now-beaten-down consumer stocks to significant outperformance for the remainder of the year.

It is simply not credible to compare the current environment to 2007. Yes, there is a divergence, but that divergence is likely to be temporary. I would do the opposite of what Mr. Johnson says.

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