No quick cure for the market's ills

Where to hide

The traditional refuge from poor stock markets lies in bonds. With interest rates falling, bond prices should rise. This year, as of March 6, the largest bond mutual fund, Pimco Total Return (PTTRX), is up 1.7%.

Bond bulls are fighting over which of two strategies are best right now: using Treasury inflation-protected securitiesto combat stagflation and using mortgage-bond funds to capture a big bounce as these emerge from under a cloud. The typical TIPS fund in the Morningstar database is up 5% this year. The average intermediate-government fund, the group that includes mortgages, is ahead 0.5%. (The S&P 500 is down 10.8%.)

Commodities are soaring, fueled by the stagflation theme -- rising prices despite economic weakness. The average natural-resources mutual fund is up 0.2%. Exchange-traded funds target every commodity niche, from PowerShares DB Agriculture (DBA, news, msgs), ahead 20.5% this year, to Elements Rogers International Commodity Metals (RJZ, news, msgs), up 26.7%.

In a bear market, equity strategies aim at reducing losses rather than eliminating them because virtually all stocks fall, large as well as small, foreign and domestic, developed and emerging markets. Cash is safer than that. Unfortunately, cash yields are shriveling toward 3%; bonds are a much likelier haven.

Thinking small

Among equities, one interesting recent development is a possible shift in leadership. Classically, big-capitalization growth stocks beat small-cap value stocks ahead of a recession. That has proved true recently; in the past 12 months, the average big-cap growth fund is down 0.1%, while the typical small value fund is down 15.1%.

But this year we have seen a sign that that could be changing. As of March 6, the average big-cap growth fund was down 12.8% for the year, while small value funds were down only 10%, on average. That could mean that investors are anticipating a recovery among small, cyclical stocks in six to nine months, restoring their long-term leadership.

(Indeed, though big caps were lower last Friday than they were on Jan. 22, small caps were higher. The UltraShort SmallCap600, which falls when small caps rise, fell 4.3% from Jan. 22 to March 7.)

They lead over long periods because small value stocks are the most sensitive to the business cycle. These companies can't defy economic weakness by relying on broad product lines or vast international operations, as large companies can. But in good markets -- and we have good markets most of the time -- they excel.

So if small value is reasserting its usual leadership, that is a glimmer of the light at the end of the tunnel.

Such a small difference over such a relatively brief period isn't a lot to bank on, however. It could be an attempt at a rally that died aborning. I would err on the side of caution in today's climate and keep my fortune well-defended.

At the time of publication, Tim Middleton owned the following security mentioned in this article: PowerShares DB Agriculture.

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