It's 'duck' season for U.S. stock fund investors
SAN FRANCISCO (MarketWatch) -- It's déjà vu all over again for stock investors.
The jarring economic and political concerns that derailed the U.S. stock market between April and June 2010 and in 2011's third quarter tormented investors in this latest quarter -- with little relief in sight as the second half of 2012 gets underway.
The Standard & Poor's 500-stock index (SPX) surged 2.5% on Friday -- its best day of the year so far -- but a 2.8% loss in the second quarter, including reinvested dividends, bares investor concerns that fixes to critical issues -- Europe's political and economic mess, China's slowing growth, U.S. economic health, deflationary pressures and a world awash in debt -- could drag on much longer than expected.
"It's an unfortunate replay of 2010 and 2011," said Brad Sorensen, director of market and sector analysis at the Schwab Center for Financial Research. "Eventually we're going to have to quit kicking the can down the road."
Indeed, investors must feel like extras in a financial-market remake of "Groundhog Day," where self-centered Bill Murray is forced to repeat 24 hours of his life until he learns, essentially, to play well with others.
Policy makers, call your agents. Investors, meanwhile, called their brokers. The old Wall Street adage to "Sell in May and go away" was a sound survival strategy in an unforgiving second quarter -- even better if you'd sold in April, as many investors apparently did. Mutual-fund investors pulled an estimated $38 billion from U.S. stock funds between April and June 20, according to the Investment Company Institute, a fund-industry trade group -- continuing an exodus that has been unrelenting since the 2008 market meltdown.
Those who lightened up on positions sidestepped losses that plagued every major category of U.S. stock funds and exchange-traded funds. The average U.S. diversified stock fund lost 4.9% in the quarter, while its ETF counterpart fell 3.7%, according to preliminary data from investment researcher Morningstar Inc. Returns slid 5%-6% on average for some midcap and small-cap groups, with the worst performer being midcap growth funds, down 6%. Still, the best of the bunch, the large-cap value category, was off 3.6%.
The biggest stock funds reflected the chilly market climate. American Funds Growth Fund of America (AGTHX) lost 4.2%, while Vanguard Institutional Index Fund (VINIX) slipped 2.8% and Fidelity Contrafund (FCNTX) lost 3.5%.
Some sector investors enjoyed pockets of relative strength. Real-estate funds led the pack with a 3.4% gain. Traditionally defensive areas also clicked: utilities sector funds rose 2.9% while health-care funds finished 1.9% higher.
Alternative-investment vehicles provided a bit of a cushion as well, with market-neutral funds down about 1%, for example. Bear-market funds, which are designed to rise when the market falls, gained around 5%; they had been up about 10% for the period before the market surged on the last trading day of June.
At the opposite end of the Street were much-maligned cyclical sectors: precious metals funds shed almost 13%; natural resources and energy funds each lost around 10% on worries about flagging global demand for materials and services.
The fallout affected markets worldwide. Europe and China were the flash point, but resource-rich emerging markets took the brunt. The BRICs crumbled -- Brazil, Russia, India and China markets having been priced for growth that now appears remote. Read more: International stock funds' world of hurt.
"Emerging markets were going to lift the prospects of the developed market economies," said George Greig, chief investment strategist at William Blair & Co. "What the market was reacting to in the second quarter was that the dynamics of emerging-market growth might be impaired on a lasting basis."
Bond funds, meanwhile, rescued investment portfolios yet again. Market experts who painted bond investors as lambs headed to slaughter landed on the wrong end of the chopping block. Read more: Bond funds could be on borrowed time.
"It pays to be a bit cautious," Schwab's Sorensen advised stock-fund buyers. "We're recommending that investors stay relatively neutral but ready to move when things become more clear about what direction we're headed."
Eye on earnings
For all the gloomy global headlines, the fundamental health of U.S. companies is relatively robust.
"The most positive thing about U.S. stocks is that they are ownership of businesses that have done remarkably well given the circumstances," said Nicholas Colas, chief market strategist at ConvergEx Group. "To think we're back to 2007 levels of earnings power is pretty impressive."
Yet it's future earnings that will be in question as the third quarter unfolds. Multinational companies with exposure to Europe and emerging markets could be doubly penalized by weak demand and the strong U.S. dollar, which cuts the value of foreign-currency transactions.
"I'm not as concerned about second-quarter results as about the outlooks that companies will talk about when they report earnings," said Chuck Severson, co-manager of Baird MidCap Fund (BMDSX) , which lost about 4% in the quarter.
Earnings worries have many managers sticking to defensive positions. High-quality, dividend-paying companies with secure cash flows command a lot of interest nowadays, and the technology sector stands out for offering the potential for earnings growth and dividends.
"We like the large-cap tech area -- they're international companies with very strong technological platforms, great research and development and strong balance sheets," said Russell Croft, co-manager of the
Still, some intrepid managers are wading into the muddy waters of economically sensitive cyclical stocks, anticipating better economic growth and if not a resolution to Europe's troubles, at least some clarity.
"When things fall apart, we buy them," said David Steinberg, managing partner at DLS Capital Management in Bannockburn, Ill.
"The best values are in things that have come down the most," Steinberg said.
"We've been pro-cyclical, pro-equities, anti-bonds, and holding our ground here as we're testing and plumbing the year's lows," added Stephen Auth, chief investment officer at mutual-fund company Federated Investors Inc. "I don't think the news is all bad, and a lot of bad news is in the prices now, for sure."