Mutual fund investors held resilient in the second quarter of the year, "shrugging off weakness in the labor and housing markets and even ignoring the rising cost of oil and gas," announced Tom Roseen, senior research analyst for Lipper, during the firm's press conference last Tuesday on the quarter's results.
"We saw in the headlines that it was a very bad quarter, the worst quarter for the Dow since 1929, but I think you are going to see that that's not the case for mutual funds," Roseen said. "Certainly for a lot of the big, large-cap and value-oriented funds it was a real dour quarter and a horrible month in May, but if you take a grander look at things, the first two months of the quarter were really, really good."
And it was investors' optimism in the face of a 45.86% rise in near-crude oil prices and recessionary fears that kept mutual funds alive, the senior analyst said.
What good news buoyed investors? "The Dow hit through the 13,000 mark for the first time since January. Investors were also encouraged by a 25 basis point cut in the Fed funds rate, so there were some things to look forward to," Roseen said. "Most importantly, during the month of April were some fairly strong earnings results and forward-looking forecasts. People ignored the disappointing GDP, revised at 0.9%, and the increasing concerns from the financials.
"Despite the first quarter talk of a recession-and we might still be in a recession-certainly, the first quarter didn't show that, and we had a strengthening in the dollar," Roseen said.
True enough, equity funds rose 5.16% in April and another 2.65% in May, but because they handed back 7.50% in June, for the quarter overall, equity funds declined a mere 15 basis points. Whereas 98% of equity funds in April and 92% of equity funds in May were in the black, only 3.2% managed to chalk up positive results in June.
The best-performing categories for the quarter, understandably, were national resource funds, up 24.5% and commodities funds, up 19.51%. The worst-performing category was financial services funds (minus 15.64%) and international real estate funds (down 11.36%).
"All bets were off in June, when we entered one of the worst one-month returns since September 2002," a year following the attacks of 9/11, Roseen said. The Dow Jones was down 19.8% since its Oct. 9, 2007 high of 14,165, and the Dow Jones closed significantly below the 12,000 mark, ending at 11,350.
"Maybe we're in a bear market," Roseen conceded, "but most people would want to see at least two or three different indices go into that 20% decline to call a bear market, but we are certainly close to that."
Coupled with first-quarter returns, however, mutual funds' year-to-date results are sure to give investors who open up their semi-annual statements a horrible case of "sticker shock," Roseen admitted. "Many will be surprised to see they lost a considerable amount of money."
For the six months through June, world equity funds have declined 11.54%, U.S. diversified equity funds are down 10.09%, mixed equity funds have given back 6.81% and sector equity funds have shed 6.07%.
Such a big decline in mixed equity is sure to concern investors, who select this category for its safety, Roseen said.
Certainly, one of the most curious ongoing trends in the quarter was mid-cap funds outpacing large-cap, with mid-caps rising an average of 3.23% in the quarter but large-caps falling by 1.05%. The real reason for the disparity, Roseen said, "was actually the growth story." For the quarter, growth funds rose 2.92%, while value dropped 2.48%.
Within the growth category, mid-cap funds delivered the best returns (4.99%), followed by small-cap (3.57%), multi-cap (1.71%) and large-cap (1.62%).
"You'll see that growth story continue as we go forward each and every month," Roseen predicted, adding that since the average run of mid-cap stocks and funds outpacing large-caps is typically no more than 12 to 16 months, and that this run has been longer, "we think there is still an argument that some of these large-caps will start taking off because they have been languishing for years on end."
Despite what has already shaped up to be a "tumultuous summer," looking ahead to the second half of the year, Roseen said Lipper analysts are confident the market will rebound despite continued geopolitical tensions in the Mideast contributing to spiraling oil and gasoline prices. Over the last half a century, he noted, only two election years ended with stocks in the red, versus 10 up years. "The incumbent president will do whatever he can to boost the stock market so that he can get his party back in power," Roseen said.
Likewise, wage-pressure inflationary fears have been tempered by the unemployment rate hitting 5.5% in June, its highest in four years, he added, and the Federal Reserve will shift its attention away from cutting rates back toward avoiding inflation, so there is only a 50-50 chance the fed funds rate will be 2.5% by Novermber.
The real test, Roseen concluded, will come in a few weeks when first quarter earnings results start coming in. But no matter the results, Thomson Reuters estimates show that fourth quarter profits are expected to grow more than 59%.
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