Despite a flurry of geopolitical turbulence, fund investors
enjoyed decent returns in the second quarter of 2014 as the
booked a six-quarter winning streak.
Investing strategists, however, are positioning themselves
defensively in the fifth year of the bull market. They believe
the stock market is long overdue for a pullback, considering that
it hasn't experienced a 10% or more correction since summer
SPDR S&P 500
) andFidelity Nasdaq Composite Index (
) both returned 5% in the second quarter, lifting their
year-to-date returns to 7% each.
Midcap value funds, up 4.63% in Q2, led large-cap and
small-cap categories, while small-cap growth brought up the rear
with 0.24%, according to Lipper. But rallying small-cap growth
led in June.
Stocks soared to new records despite fears that rising
would hurt consumer spending, which accounts for 70% of the
economy, and concerns about U.S. gross domestic product shrinking
2.9% in the first quarter.
"The GDP (data are) ancient history for the market," said
Randy Frederick, managing director of trading and derivatives at
the Schwab Center for Financial Research. "A lot of pent-up
demand was taken up in the second quarter."
Investors aren't showing the euphoria typical of market tops,
but record margin-debt levels on the New York Stock Exchange, an
confidence in the newly elected prime minister to kickstart
Emerging markets gained 6.51% in the second quarter,
recovering all of last year's losses. Laggards one year often
become leaders the next year in accordance with the "reversion to
the mean" theory as investors flock to the cheapest areas of the
stock market and sell more expensive assets.
Emerging markets trade at 11 times projected earnings and 1.4
times book value, while developed foreign markets trade at 15
times earnings and 1.5 times book, according to Morningstar.
If oil prices rise sharply, emerging markets, which consume
half of global production, would likely spiral into recession,
and the rest of the world would soon follow, wrote David Levy,
chairman of the Jerome Levy Forecasting Center, in a
"Rising fuel prices would force consumers to use a little less
fuel but still spend more of their incomes on it, undermining
revenues and profits in other product markets and thus weakening
pricing elsewhere," Levy wrote.
Japan climbed 7.29% in the second quarter, rebounding from a
loss in the first quarter.
"Japan is by far the cheapest developed market today, and
monetary accommodation there is expected to last a couple years
beyond the U.S. cycle," BlackRock stated in its midyear
Japan's market, as tracked by
MSCI Japan (
), has a price-earnings ratio of 13.5 and a price-to-book ratio
of 1. Europe, as tracked by
MSCI Europe (IMEU), trades at a more expensive P/E of 15 and P/B
Europe funds lagged all global markets with a 1.46% return in