It was a month for celebration. The S&P 500 finally
climbed to a record high in April, surpassing its October 2007
peak. That echoed the Dow industrial's record ascent in
But confetti and champagne were rarely spotted. The average
U.S. diversified stock mutual fund barely broke even in April,
eking out a 0.78% gain, according to Lipper Inc.
That was a below-median performance, ranking No. 135 among the
past 240 months. It left them up a solid 11.06% for the year.
The S&P 500 rallied 1.93% last month, for a 12.74%
year-to-date gain. The Dow industrials tacked on 1.94% for a
14.11% gain so far this year. The Nasdaq composite rose 1.88% to
make its 2013 advance 10.24%.
The S&P 500 closed April up 140% from its infernal 666 low
in March 2009.
Funds with defensive traits -- large cap holdings paying
dividends -- fared best.
"Fear of central banks pulling back their support makes
investors nervous," noted Joe Milano, manager of $4 billion T.
Rowe Price New America Growth Fund .
Small-cap value and core funds both averaged a 0.71% loss last
month. Small-cap growth funds tumbled 1.14%.
Warning signs in the broad market abounded. "Anything touching
residential housing has been strong," Milano said. "Otherwise
we've seen spotty data on consumer confidence and jobs. GDP data
came in low. The (preliminary) Purchasing Managers' Index for
April was down (to its lowest level in six months). It's not
consistent. European data has been inconsistent. No one is
feeling great about data out of China."
"I expect the market to finish higher this year," said Bob
Doll, chief equity strategist for Nuveen Asset Management, which
has $120 billion in assets under management. "I'd be shocked if
we went from here to Labor Day without a pullback."
Doll is watching corporate earnings. "Q1 earnings have been
reasonably good vs. expectations. But revenues have been sloppy.
And forward guidance has been iffy."
Doll expects many investors to shift into cyclicals. "I'd move
assets to take advantage of that rotation, even if the rotation
does not occur right away," he said.
Stock mutual funds are riding a wave of net inflow for 16
weeks in a row as of the week ended April 24, according to the
Investment Company Institute. That inflow, which spans the
year-to-date, totals $77.07 billion.
Taxable bond funds have had 47 straight weeks of net inflow,
dating back to the week ended June 6, 2012. That inflow totaled
The leading domestic stock fund sectors in April were
traditionally defensive ones. Real estate funds gained the most
ground, adding on 5.84%. Utility funds powered their way to a
5.02% advance. Telecom funds rang up a 4.90% gain. Health care
funds advanced a 3.47%.
"We haven't had macro and company-specific data points that
would light fires and convince people things are getting better,"
said Ron Sloan, chief investment officer of Invesco's U.S. core
equity team and senior manager of $5.7 billion Invesco Charter
So most of the defensive-stock buying stemmed from investor
caution, he said.
"The economy is growing at a slow slog of a pace," Sloan
added. "And that's not an environment that will force the Federal
Reserve to stop printing so much money with its unconventional
That situation prolongs the buildup of what Sloan sees as a
bond bubble. And Fed-induced low rates force people to seek yield
from riskier sources.
So some of the defensive stock buying was due to people
pursuing yield in the form of dividends. "The leaders in April
(were) stable names and income-focused subsegments," said Chris
Bartel, head of Fidelity Investments' global research and its
Among market-capitalization and style categories that don't
short or use leverage, equity-income funds led, with a 2.25%
So did large-caps, especially value-oriented funds with their
1.78% advance. "Small caps tend to be more cyclical and lower
quality," Nuveen's Doll said. "And not many pay dividends."
Gold funds suffered the worst setback by far, surrendering
17.71%, leaving them down 31.82% so far this year.
Basic materials funds lost 2.57%. Natural resources lost 0.50%
last month. And tech, a growth bellwether, lost 0.65%.
"Tech hardware has been especially tough," Bartel said. "The
PC food chain has been really challenged. The rise of tablets has
hurt. So has declining average selling price for PCs. And so have
tough results fromApple (
), which was expected. But also fromIBM (
), which had been a juggernaut."
Q1 earnings were not strong, said Invesco's Sloan. And
companies have been saying profits will slip in Q2. "But many are
not changing their forecasts for the year," he added. That
portends a much stronger second half.
"Companies are increasing their guidance for cap-ex spending,"
he said. "That says they are sacrificing margin in the short run,
guiding expectations down because they're taking cash to make
money in the future. Many will trim dividends and buybacks to do
In addition to a strong second half, that bodes well for next
If that scenario plays out, providers of capital expenditure
goods should start to see benefits in the second half, he says.
"Networking companies, mobile enabling companies on a software
basis and on a hardware basis should see a robust second half,"
"Apple's 5S will be introduced in the fall," Sloan added. "So
vendors of semiconductors on a testing basis, radio frequency
basis, assembly basis should start to see benefits in Q3."
If activity picks up, look for early cycle companies
), he said. "They make drilling bits. Their product is consumed
in producing things. Bits and teeth wear out in cutting holes,
Parker Hannifin (
) is another potential industrial beneficiary. Its motion and
control products are used in a variety of machinery, in a wide
range of industries. "They should see better order growth in the
second half," Sloan said.
Fidelity's Bartel likes health care in a low-growth
environment. He sees a lot of promising innovation in biotech. In
tech, he likes companies focused on big data, software as a
service and cloud computing.
Where growth will be hard to find, T. Rowe Price's Milano
). "They provide data and analytics to financial institutions to
help them make better decisions regarding lending," he said.
"Risks for lenders are picking up. So the need for Equifax's
services should grow. This has predictability and recurring
Nonresidential construction is picking up. "Companies
likeFastenal (FAST), which sells construction hardware, andMartin
Marietta Materials (MLM), which sells construction aggregate --
rocks -- should benefit," he said.
And Milano likes video game retailerGameStop (GME). "There's a
faction of people who short the stock who think people will no
longer buy video games in stores because they will download them
instead," he said. "But GameStop is earning $3 a share. That's a
long way from the zero that the shorts are banking on. And free
cash flow is over $4 a share. They're buying back a ton of stock.
And their yield is over 3%."
And Milano sees a catalyst. Sony and Microsoft have said they
will unveil new game consoles. "That tends to reinvigorate the
business," Milano said. "So after downtrending for years, this
stock has a new product cycle coming up just as everyone is
looking for growth."