Health Care Heartiest, Gold Funds All Red In November


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Mutual fund investors scored a third straight month of gains in November as stocks scaled epic highs.

The average U.S. diversified stock mutual fund returned 2.7% for the month and is up 29.1% year to date, according to Lipper Inc., on the back of expectations for continued monetary stimulus from the Federal Reserve.

The stock market climbed the proverbial wall of worry in the face of rising interest rates and weakness in employment, housing, commodity prices and consumer confidence -- not to mention fears of an asset bubble inflated by the Fed's unprecedented bond-buying spree, known as quantitative easing.

Bullish fund managers are mostly optimistic that the Fed will stand pat on its easy-money policies to support the economy for the foreseeable future.

"Unemployment is way above where they want it to be, and (Federal Reserve Chair nominee Janet) Yellen is more concerned about it than (Fed Chairman Ben) Bernanke," said John Barr, manager of $140 million Needham Growth and $67 million Needham Aggressive Growth .

The S&P 500 added 2.8% and closed at record highs. The Nasdaq picked up 3.6%, ending at a 13-year high. The S&P 500 soared past the psychologically significant round level of 1800 -- surpassing consensus projections of 1750 for this year. Wall Street on average expects the S&P to rise to 1900 next year and for the Fed to start scaling back QE in December or January.

Since 1926, there have been 32 years in which the S&P 500 returned more than 20%, including dividends, and on average the index gained 11.5% following those years, according to Delta Investment Management in San Francisco, with $35 million in client assets. In those 32 years, the market closed higher about seven out of 10 times. The average loss during the losing years was 6.6%.

"These risks are known by investors and somewhat discounted into current stock market valuations," Delta Investment Management wrote in a client note. "As long as tapering by the Fed is well communicated and gradual, and as long as 10-year Treasury rates remain below 5% and show modest volatility, there is no reason for us not to expect 2014 to be another good year for stocks."

"Global economic growth and a steadily improving U.S. economy should continue to lift equity valuations higher," Delta added.

"Research shows that as long as the 10-year Treasury rate is below 5%, gradually rising interest rates have a positive correlation with appreciating stock values."

The 10-year Treasury note yield rose 18 basis points in November to end at 2.75%.

Heartiest Sector Performance

Steroidal gains fueled by mergers and acquisitions coupled with positive research results at biotechs vaulted health care/biotech funds to the top of the leader board. They returned 5.43% in November and an eye-popping 46.4% for the year. The health sector had the greatest percentage, 67%, of companies beating third-quarter revenue forecasts as well as the highest growth rate among the 10 S&P sectors at 5.7%, according to FactSet. Next to technology, it had the second-highest percentage of companies, 80%, reporting earnings surprises.

M&A activity will continue to stoke bullish sentiment for biotech companies, according to Aegis Capital. Large-cap pharmaceuticals such asAstraZeneca ( AZN ),Eli Lilly ( LLY ) andMerck ( MRK ) are under pressure to acquire new drug pipelines as their drugs face patent expirations.

"This stokes investors' appetites for new public offerings and follow-on equity financings by existing emerging companies," Aegis analysts wrote in a November health care update. A strong stock market and the Fed's easy-money policy has buoyed the biotech IPO market -- the hottest since 1999, they noted.

Health care reform legislation, commonly referred to as ObamaCare, has hurt the pharmaceutical industry's profitability, but it will benefit from the significant increase in new demand next year when as many as 32 million currently uninsured Americans will get health coverage, Herman Saftlas, an equity analyst at S&P Capital IQ, wrote in a research note.

Pharma is one of the highest-margin industries with enhanced prospects from the growing elderly population, who account for a third of sales, he added.

Global drug sales totaled $962.1 billion in 2012 and are forecast to see a compounded annual growth rate of 3% to 6% over the five years through 2017, according to IMS Health.

The research firm sees an expanding middle class worldwide, new specialty medicines, rising drug costs and stronger economic growth prospects in developed nations helping to push sales over $1 trillion in 2014.

The fastest-growing markets in Asia and Latin America are expected to enjoy 10% to 14% annual growth because of increasing government and private insurance funding. An average 35 new medicines are forecast to launch annually.

Gold Drowning In Red

Precious metals funds, down 11.03%, were the worst-performing sector in November and the only major one drowning in losses for the year.

Their year-to-date decline deepened to 47.5%. Gold prices, as tracked bySPDR Gold Shares ( GLD ), fell 5.5% for the month to 120.70, which translates roughly to $1,207 an ounce. The yellow metal lost 25.5% year to date -- its largest one-year loss in 32 years.

The gold bugs blame fears of the Fed scaling back its stimulus program for the loss, even though it's been declining ever since reaching an all-time peak of $1,858 an ounce in September 2011. Gold even failed to recover after the Fed announced a third round of quantitative easing, or QE3, in September 2012.

The sell-off has sent gold miners' valuations to a decade low and prices could rebound just because of seller exhaustion, said Adrian Day, manager of the EuroPac Gold with $18 million in assets and president of Adrian Day Asset Management in Annapolis, Md.

"Stocks jumping higher on positive news suggests that the selling is close to an end," Day said in an email. "I tell investors that this is the time to buy. They should not be chasing the markets that have done well but buying markets that have been weak."

Silver prices, as tracked by iShares Silver Trust ( SLV ), plunged 8.8% in November and 34.5% year to date.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Mutual Funds
More Headlines for: AZN , GLD , LLY , MRK , SLV

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