Confusion, terrorism and risk in general hang heavy over the global economy, but Mr. Market is getting used to the noise.
Measured by year-to-date returns, the broad stock market continues to post returns firmly in the black. The Russell 3000 Index, for instance, has climbed 2.6% so far this year, through August 10, as the table below shows.

But lest we get too excited, it’s worth mentioning that 2.6% is less than spectacular in a world where a low-cost money market fund offers a yield nearly twice as high. Risk, in short, just isn’t paying off like it used to.
In addition, much of the rise in the stock market this year comes on the back of value stocks. The Russell 3000 Value has risen nearly 8.8% year to date. By contrast, the Russell 3000 Growth is down more than 3%.
In fact, all measures of growth are in the red so far this year across the large-, mid- and small-cap equity spectrum for U.S. stocks, as you can see from the graph below.

Equity investors are in a defensive mood this year, a notion supported by looking at the ten major sectors in the S&P 500, where cyclically sensitive stocks have tumbled so far in 2006. Info tech stocks have suffered the most, falling by more than 9% this year. Meanwhile, consumer staples, utilities and energy continue to shine.

Then again, if the predictions of a slowdown prove true, it’s odd that the stock market generally doesn’t look all that concerned. One reason: earnings continue to hold up. As Michael Krause of AltaVista Independent Research notes in a recent report, second-quarter earnings continue to surprise on the upside. “Overall earnings look set to come in about 12.8% higher compared with the same period last year, and slightly better than the 11.9% growth recorded in Q1 of this year,” he writes.
But if the recent past still impresses, the immediate future is another story. “The good earnings picture,” Krause continues, “is clouded by the fact that full-year estimates have only risen about half as much as the upside surprise in Q2 results would dictate, suggesting that on the whole guidance and other comments made during the conference calls in which analysts discuss the fundamental outlook with company management teams were negative enough to prompt analysts to cut Q3 and Q4 estimates.”
With all the talk of an approaching economic slowdown, equity investors may be wondering if the positive returns posted in broad and value equity indices are set to join the losses that dominate the world of growth stocks. Perhaps, although Krause suggests it’s still not time to throw in the towel on hope. Earnings are once again the reason:

Expectations would have to decline a long way before earnings could be described as average; despite this recovery’s age, earnings growth of 12.6% this year and 10.2% next year are still well above the post World War II average of 6.3%. Meanwhile, forward P/E is just 14.1x, a tad below its long-term average of 14.5x. This suggests that the reflexive defensiveness of the past month may be overdone.