Ron Baron, a big name in the small-cap world, has a definitive answer for all those investors frightened by the stock-market gyrations of August: “Summer ’11 is not Fall ’08.”
In his latest quarterly letter to clients, the Baron Funds chief investment officer tries to make some sense of the precipitous market declines that occurred last month amid the protracted debt-ceiling debate, the S&P downgrade of U.S. credit and the banking and political crisis swirling over too-big-to-bail Italy and Spain.
Baron reminds investors how much worse things were in 2008. After the fall of Lehman, he writes, “We were startled to hear that significant declines in sales were taking place magnitudes larger than any we had ever heard about.” Businesses responded by cutting expenditures, firing workers and reducing pay while frozen capital markets prevented businesses from borrowing to sustain their operations.
In contrast, today’s U.S. banks have been successfully recapitalized (and Baron argues Europe has no choice but to recapitalize its banks); capital is available and cheap; growth businesses such as in Silicon Valley are hiring again; and corporate profits are beating consensus estimates.