Weekend Investor: How fund investors can weather parched marketPosted on Saturday, July 2, 2011 - 03:16 am
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) — Mutual-fund and exchange-traded fund investors took to the U.S. stock market’s sidelines in the second quarter, preferring to watch the game rather than play.
And what a game it was. Investors saw a rough 13-week stretch where the market fell far enough to make people wonder if their worst-case fears had materialized, then rallied back with enough power to cast those concerns aside.
Stocks came “back from the brink” in the quarter, according to Richard Ross, global technical strategist at Auerbach Grayson & Co.
The late-quarter surge pushed the average diversified U.S. stock fund to an essentially flat finish for the period, down 0.3%, according to preliminary data from investment researcher Morningstar Inc.
Most every U.S. stock-fund category turned in similar results — hovering around the flat line — with the exception of traditionally defensive sectors including health care, consumer staples and utilities.
Those broad results mirrored the S&P 500 Index /quotes/zigman/3870025 SPX +1.44% , which lost 0.4%, excluding dividends, but trailed the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA +1.36% , which gained a relatively generous 0.8%. The S&P 500 is up 5% so far this year, without dividends, while the Dow is up 7.2%. Diversified U.S. stock funds also have been rewarding, rising 6.2% on average.
The question now is whether the June rally was a technical rebound from oversold conditions that is likely to go bust as the summer progresses. Or will corporate earnings remain healthy and consumer sentiment improve enough for the market to move higher?
That upbeat prospect seemed unlikely just a couple of weeks ago. The S&P 500 shed 7% from the end of April to mid-June. Investors fretted about slower U.S. and global economic growth, fractures in the euro zone, the end of the Fed’s QE2 economic-stimulus program and the risks if the U.S. debt ceiling isn’t raised. Plus, there’s unrest in the Middle East that could disrupt oil supplies.
Those threats still exist, yet the bulls have been able to gain the upper hand. A resolution for Greece’s debt crisis, at least a temporary one, helped the U.S. and global markets in general to reverse course. In the last week of June alone, the S&P 500 rose around 3%, propelled by better U.S. manufacturing data and signs of strength coming from the bellwether Dow Transports /quotes/zigman/627450 DJT +2.30% .
“It’s a bullish display of fireworks,” Auerbach Grayson’s Ross said. “Is this a one-week wonder? We’ll soon find out.”
High and low spots
Retail fund investors pulled $23.5 billion from U.S. stock funds in the quarter through June 22, according to the Investment Company Institute, an industry trade group. That was a stark reversal to the first quarter, when $15.7 billion cascaded into domestic stock funds.
U.S. knocking at debt's door
The debate over raising the U.S. debt ceiling will be hotter than July, making the next few weeks rocky for stocks and bonds, says Harvey Rowen, chief investment officer at investment manager Starmont Asset Management. He tells Jonathan Burton that he's taking risk off the table.
Yet international-stock funds stayed on favorable terms with buyers, despite lackluster performance. Read more: Where international stock funds are finding value.
Investors also embraced the perceived safety of bond funds, which in fact proved to be a lucrative move. Read more: Why bond funds continue to shine.