Promises, promises. Investors took to heart the third-quarter
pledge by European Central Bank President Mario Draghi to save
the eurozone. Federal Reserve Chairman Ben Bernanke's stimulus
mongering also boosted the U.S. market.
But Draghi's vow -- and reassurances by other European
policymakers throughout the third quarter -- moved investors
Europe stocks and funds generally outperformed their U.S.
counterparts in September and the third quarter
Europe's stocks also had more momentum. They were coming off a
deeper low, which they hit June 4.
Europe stock funds soared 3.64% last month and 8.77% in Q3,
according to Lipper Inc. They helped push world equity funds up
3.71% and 6.63% in those periods. Those advances outdistanced the
2.26% September gain by U.S. diversified stock funds and their
5.29% Q3 gallop.
That was the best Q3 surge by U.S. diversified stock funds
since 2010. And it was that group's eighth best Q3 since 1982, a
span of 31 third quarters.
The S&P 500 rallied 2.58% last month and 6.35% in Q3. That
was far better than last year's catastrophic -13.87% Q3.
"Europe did a little better in the quarter and in September
because of the appearance that they were getting their arms
around their financial crisis," said David Francis, head of
equity investments for Thrivent Financial and manager of its $364
million Large Cap Growth Fund .
Large Cap Growth's 19.50% gain this year going into Tuesday
topped 86% of its peers tracked by Morningstar Inc.
Draghi vowed on July 26 to do "whatever it takes" to keep the
eurozone from collapsing.
On Aug. 31 Bernanke said at the Fed's Jackson Hole, Wyo.,
economic summit that the central bank would take whatever strong
steps are needed to amp up the nation's sluggish recovery.
"Draghi's remark was followed by Bernanke's," Francis noted.
"So you had the two central bankers of the largest economic blocs
saying the gloves are off, they will do whatever it takes to
solve unemployment for the U.S., the financial crisis for
The S&P 500 continued to trend up. Its intraday high of
1474.51 on Sept. 14 and its close were peaks not seen since
Not bad for the market's historically worst month.
The big-cap index gained 2.25% in August and 1.39% in
It was up 16.44% for the year through the end of
Europe stock funds averaged a 13.63% gain through the first
nine months of the year. That topped world equity funds' average
of 11.46%. But it trailed India stock funds' average of
U.S. diversified stock funds were ahead 12.85% through the
first three quarters.
Bullish sentiment was fueled on Sept. 13 by the U.S. central
bank's QE3 action. The Federal Open Market Committee said the Fed
would buy $40 billion a month of mortgage-backed securities. If
the employment rate does not improve, the FOMC said it might buy
The FOMC also extended its near-zero interest rate policy into
2015. The group said it would continue its Operation Twist -- a
campaign of selling short-term debt and buying long-term debt to
flatten the yield curve and bolster the dollar.
Gold Funds Surge
Precious metal funds easily outpaced other sectors last month,
rocketing 12.75%. Their 22.39% Q3 gain also paced sectors.
"Bernanke is trying to reflate the economy," said Ron Sloan,
chief investment officer of Invesco's U.S. core equity team. "He
said he doesn't care if this leads to inflation. Gold did well
precisely because investors believed him. They expect inflation
as a result of this latest round of quant easing."
Despite the blustery no-backing-down talk by central bankers,
key questions hang over the markets.
One is when will Congress act to prevent the nation from
plunging over the fiscal cliff, the year-end precipice of tax
hikes and spending cuts that threatens to plunge the U.S. back
into a recession?
"We expect compromise, but not until after the election," said
Andres Garcia-Amaya, global market strategist for JPMorgan Asset
Another question: When will Europe solve its fiscal woes?
"Investors have heard the promises," Francis said. "Now they want
to see concrete steps."
A third question: When will economic growth speed up in
emerging markets? Emerging markets lagged Europe in Q3, although
they topped the U.S. Emerging market funds gained 6.86% on
average in Q3.
"Emerging markets are cheap," Francis said. "But people are
looking for a catalyst."
That's largely because of questions about how much demand
exporters will see from China.
Many investors want to see signs of stronger demand from
China, says Garcia-Amaya.
But Chinese authorities, especially in the lead-up to their
once-a-decade leadership transition in November, remain
"They're focused on keeping inflation under control while
providing enough stimulus to keep their economy from a hard
landing," said Garcia-Amaya.
Within months after the transition takes place, the new
leadership could start stimulus steps, Garcia-Amaya said.
"But historically they do not make bold decisions right away,"
Less Rosy Outlook
U.S. businesses are less optimistic about how much the Fed's
stimulus steps will aid economic growth than they were when such
steps debuted in 2008, Sloan says.
"What we're seeing is businesses start to retrench," said
Sloan, who is also senior manager of $5.5 billion Invesco Charter
"They are selling off noncore pieces of business," he added.
"We're seeing inventory levels come back down. We've seen cap-ex
and durable goods numbers roll over. And we see companies talking
about cutting operating expenses."
Illinois Toolworks (
) is an example. "It has started to delete businesses," Sloan
said. "It has been a great consolidator. Now it will start to
slice off chunks of business."
Cisco Systems (
) is another example. "They are becoming more conservative,"
Sloan said. In August the firm said Q4 sales and EPS growth beat
views. It also raised its dividend 75% to 14 cents a share.
"Sales are up because everyone is trying to do more with
less," Sloan said. But Cisco's dividend move is not something
done by a firm that has robust growth prospects, he noted. "We
like them, but we understand how they've reacted."
Looking To Emerging Markets
Thrivent's Francis says he is positioning to benefit from
growing wealth in emerging markets.
For one thing, he has addedNestle (
) to his portfolio. "It's a big, global brand that will benefit
from the world and emerging markets especially becoming
wealthier," he said. "It's domiciled in Europe, but its sales are
global. And it has gotten attractively cheap."
He also likesAnheuser-Busch InBev 's (
) exposure to increasing consumption in emerging markets. "When
people get wealthier, they drink beer," Francis said. "In the
short term it is somewhat defensive. Long term it is a play on
global consumption trends."
He has built his stake inHome Depot (
) in recent disclosures. "It's a play on the recovery in the
housing cycle," he said.
The Commerce Department said new-home prices rose a record
11.2% in August to $256,900, their highest median price since
And he likes money center banksJPMorgan Chase (JPM)
andCitigroup (C). The eurozone financial crisis is forcing
European banks to retrench. Better capitalized U.S. banks should
increase their share of lending to European corporations, he
Chris Leavy, chief investment officer for Fundamental Equities
of the Americas at BlackRock, also likes big U.S. banks. Plus,
he's bullish on tech companies that benefit from mobility.