The hunt for a haven

Mutual-fund investors may be feeling a little at sea about now, and very much in need of a safe harbor, if not a life raft.

A crisis of confidence in corporate governance, made worse by a wave of accounting scandals, has helped push Wall Street's main stock indexes deep into the red in their worst performance since the early '70s.

The scandals represent just one factor among several. Stir in lackluster corporate-earnings expectations, the war on terrorism, and the prospect of continuing turmoil in the Mideast, and even stoic 401(k)-holders with long-term investing horizons may feel they're in for a blow.

This has been the longest downturn since the late 1940s, with consecutive down quarters since the dawn of this decade.

Investors may also worry about finding credible navigators, after a period in which it became startlingly clear that brokers' "touts" sometimes put brokerages' interests far ahead of theirs.

And that confluence of troubling trends has had a real impact. At the second quarter's end, the bellwether Dow Jones Industrial Average had fallen by about 11 percent. Last week, to start the third quarter, the Nasdaq plunged to a five-year low.

Yet market experts point to a few havens. Many are abroad. Not that it's time to strike the colors. Bright spots can also still be found in the US economy. Among them: the robust housing and real estate markets and the healthcare and natural-resources sectors.

Consumer spending dipped slightly in May, the Commerce Department recently announced, but that was only the first time in six months. That has propped up some consumer-goods firms.

Across several industries, small, agile companies show promise. Small-cap value funds continue to perform well. Some stock experts have begun to eye the smallest of small-cap funds, micro caps, whose low-profile firms can offer great potential for growth.

What will it take to cheer the investor fleet – and turn it back to buying?

For now, Wall Street resists the prevailing economic trends, say longtime market watchers such as Al Goldman, chief investment strategist for financial house A.G. Edwards & Sons, St. Louis.

"The economy is coming back," says Mr. Goldman, citing the government's recent upward revision of first-quarter gross domestic product (GDP) from 5.6 percent to 6.1 percent.

But "fear [among investors] is at an extreme," he says, referring to small and institutional investors alike.

Goldman believes the intense media drumbeat on the accounting scandals may be helping to depress the market. Perspective is important: Out of some 10,000 to 12,000 publicly traded companies in the US, so far only a handful have been implicated, Goldman notes.

And Goldman is among many experts now suggesting recovery will soon take off, barring, perhaps, a new terrorist incident equal in intensity to those of Sept. 11.

"The economy is NOT rolling over," insisted investment house Merrill Lynch & Co. in a recent economic analysis.

Merrill Lynch estimates that second-quarter GDP grew at 3.5 percent. If true, that would mean the economy grew at just over 4.5 percent for the first half of the year.

That compares quite favorably with other postrecession-year gains.

Still, investor unease helped pull down most fund categories in the second quarter. Only one major domestic category – real estate – was up substantially, according to Morningstar Inc., the Chicago-based fund tracker.

Pacific/Asia funds posted gains. So did Japan and South Korea funds, and even a select few funds invested in emerging markets.

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