Although the stock market rose for a fourth straight month in
February, mutual fund investors had to fasten their seat belts as
volatility increased in the second half of the month.
The choppiness came amid worries over federal spending cuts --
known as sequestration -- hints of the Federal Reserve curbing
bond purchases sooner than expected and Italy's election leading
to political instability.
The average U.S. stock mutual fund added 0.89% in February and
6.27% year to date. Foreign funds on average shed 0.65% in
February as the dollar rallied 3.5%. They've returned 2.94% year
to date. The S&P 500 added 1.10% to 1514.60, about 4% shy of
its October 2007 all-time high of 1576. It's ahead 6.86% for the
year. The Dow picked up 1.40% and the Nasdaq 0.57% for the
March is seasonally bullish for the market and the Federal
Reserve has been juicing economic stimulus, or quantitative
easing (QE) programs, before corrections get too deep, Jeffrey
Hirsch, chief editor of Stock Trader's Almanac and manager of
Magnet AE Fund, said in his latest client missive.
Since 1945, years in which both January and February rallied
corresponded with outsized gains for the year 92% of the time,
Birinyi Associates told clients.
Mutual fund managers say they see the stock market chugging
ahead, citing several drivers: the housing recovery's resulting
wealth effect, improving employment rates, paltry interest rates
weaning investors off bonds, strong fourth-quarter earnings and
record cash hoards that companies can use to buy back shares or
In addition, the S&P 500 trades at 14 times forward
earnings, a reasonable valuation, while both earnings and
dividends are higher than their October 2007 zenith.
"The inverse of this multiple is an earnings yield of 7%
compared to the 10-year Treasury yield at 1.9%. This historically
wide risk premium indicates the potential reward for holding
stocks outweighs the underlying downside risk," Eric Marshall,
Dallas-based co-portfolio manager of Hodges Small Cap Fund with
$401 million in assets, said in an email.
Bonds pose greater risk because if historically low interest
rates start to rise, bond prices will fall and eat away
"(This) could result in a wall of money coming out of bonds
and into stocks over the next two to three years," Marshall
His best investment idea now isBriggs & Stratton (
), which he believes will indirectly benefit from a multiyear
recovery in the housing market. The Wauwatosa, Wis.-based firm
produces gas engines for equipment makers, generators, lawn
mowers, garden equipment and other machines.
"Trading near $19 a share to reflect a forward
(price-to-earnings) ratio of roughly 11.5 times, we believe the
stock's multiple is attractive especially since the company
appears to be in the very early stages of a new growth cycle,"
Marshall wrote. "(Briggs) has also completed several
restructuring actions that has consolidated manufacturing
capacity and lowered overall costs, which should result in higher
operating margins over the next couple of years."
The company has little debt, has been buying back shares and
has a dividend yield of 2.5%.
Continued improvements in the housing and labor markets and
corporate earnings surprises will support stock prices, says
Richard Weiss, a portfolio manager at American Century
Investments with $16 billion of assets under management in
Mountain View, Calif. But the market could sell off, owing to
instability in Europe, slower economic growth in China and
political conflict in the Middle East, he said. He's overweighted
his portfolio in real estate and growth stocks.
Lawrence Creatura, portfolio manager of Federated Clover Small
Value with $382 million in assets, is playing the housing
recovery by investing in building products makers. His top
holdings includeAxiall (
), a plastic pipe and moldings maker formerly named Georgia Gulf,
), a gypsum wallboard and construction plasters maker. Creatura
is also betting on defense and aerospace firms --Lockheed Martin
) andRaytheon (
) -- which he believes sold off to attractive levels on fears of
federal spending cuts.
Among sector funds, consumer goods topped the equity leader
board, gaining 1.24%. Precious metals equity funds crashed
hardest, losing 10.56%.
Gold and silver prices melted 5.1% and 9.53%, respectively, as
the greenback rose to its highest level in nine months owing to
the eurozone's economic deterioration and Japan's move to devalue
its currency to boost inflation.
In recent months, Creatura trimmed holdings in the consumer
discretionary sector, mainly luxury goods and apparel retailers.
Consumers are spending less on discretionary products owing to
the payroll tax cut expiration, higher gas prices and fears of
"People don't splurge as much when they're bombarded by
talking heads on TV talking about fiscal uncertainty," Creatura
Russell Croft, manager of $302 million Croft Value Fund , has
underweighted his portfolio in consumer discretionary stocks for
the same reasons. He favors large-cap, dividend-paying U.S.
companies trading at "reasonable valuations," such asJohnson
& Johnson (JNJ),Honeywell (HON) andWilliams Cos. (WMB), which
yield 2.3% to 3.9%.