took mutual fund investors on a turbulent ride in the third
quarter but in the end rewarded risk takers for hanging on.
had best brace for more volatility in the final quarter of 2013
as the market confronts another Fed meeting, third-quarter
corporate results and an Oct. 17 debt-ceiling deadline.
The average U.S. stock fund tracked by Lipper Inc. rose 4% in
September and 7% in the third quarter -- a period rocked by fears
over Fed tapering, war with Syria and political gridlock on
Capitol Hill. But more worrisome were slower corporate earnings
growth and a threat to the housing recovery from vaulting
SPDR S&P 500
) added 3% and 5% over the same periods, booking gains for a
third straight quarter.
S&P 500 companies are forecast to grow Q3 earnings a mere
4.6% year over year, the slowest pace in four quarters, according
to Thomson Reuters. Earnings growth is expected to accelerate to
11% in Q4.
The benchmark index currently trades at a trailing
price/earnings ratio of 16, about average compared with its
historical P/E. But on a forward price-earnings basis, it trades
at a slight discount of 15.
The average taxable bond fund rose 1.1% in Q3 as the benchmark
10-year Treasury yield sped nearly 100 basis points from a
historic low of 1.66% in May and nearly breached 3% in September
before settling at 2.64% at month's end.
Interest rates will continue to tick higher over the next few
years but that's a healthy development for the economy and the
stock market, says Mike Levine, manager of Oppenheimer Equity
Income with $5 billion in assets.
It will signal stronger economic growth and rising employment
rates, thereby leading to earnings growth, Levine said. He
expects the Fed to start tapering its stimulus program within the
next six months. "Delaying it will just cause more pain down the
road or more dislocation," he said.
During the summer sell-offs, he added to his stakes in
homebuilders, noting that the country is still in the early
stages of a housing recovery. Levine also added to positions in
real estate investment trusts, commercial mortgage REITs and
consumer discretionary stocks, which he believes sold off
indiscriminately on fears of rising rates.
"Interest rates and mortgages are still at historically
attractive levels, and combined with a gradually improving
employment picture, housing can continue to do well going forward
even if rates rise from here," Levine said. "The government is
going to do everything they can to get the housing market back on
Morningstar data show during July and August Oppenheimer
Equity Income boughtWeyerhaeuser (
), a REIT that produces lumber, andAmerican Homes 4 Rent (
), a REIT that buys and rents houses. It added toDigital Realty
), a REIT that specializes in tech-related real estate, and
homebuildersStandard Pacific (
) andBeazer Homes (BZH).
Oppenheimer Equity Income returned nearly 4% in Q3 and 20%
year to date, on par with the S&P 500. Rising interest rates,
which go hand in hand with falling bond prices, are expected to
increase demand for stocks as investors shun bonds in search of
yield income in dividend-paying stocks.
"The spell under which the bond market has kept investors,
large and small, for some years now has been broken, and it is
likely that there will be continued, if uneven, reallocation of
portfolios into equities," John Carey, portfolio manager at
Pioneer Investments with $220 billion in assets under management
in Boston, said in an email. "Demand for equities is likely to
support share prices for the next several years."
He's most intrigued now by this year's underperforming
sectors: technology, basic materials, utilities and energy. "Many
of the large tech companies are selling at almost deep-value
levels, deservedly or undeservedly," Carey wrote.
Carey's mutual fund, Pioneer , with $5 billion in assets,
returned 6% in Q3 and 21% year to date. The low-turnover fund
bought only two stocks this year: search-engine blue chipYahoo
(YHOO) and Ireland-based drugmakerMallinckrodt (MNK), according
Precious Metals Funds Tarnish
Precious metals were the only sector funds to lose value in
September, falling 9%, despite a weakening dollar, which usually
moves opposite gold. That pared their third-quarter return to
The price of gold jumped 19% off of a three-year low at $1,192
an ounce in late June to a three-month high of $1,419 an ounce in
late August. It fell back into a downtrend for most of September.
It spiked 4% Sept. 18 after Fed Chairman Ben Bernanke announced
holding on to the central bank's current bond-buying spree
because inflation and unemployment haven't reached Fed
That turned out to be just a countertrend rally, because gold
resumed its downtrend right after, ending the month at
Bank of America Merrill Lynch set its year-end gold price
target at $1,200 an ounce. "Even a dovish Fed will ultimately
tighten monetary policy, and higher opportunity costs means head
winds to gold prevail," BofA Merrill's strategists wrote in
metals report Sept. 19.
"The business cycle puts gold in an uncomfortable position.
Higher growth, rising nominal yields and subdued inflationary
pressure have all limited investor buying," they added.
Gold loses appeal when interest rates rise because investors
opt for yield income in bonds whereas gold pays nothings. Gold
would likely rally in the unlikely event that lawmakers fail to
raise the debt ceiling, says Russ Koesterich, chief investment
strategist for BlackRock.