Mutual fund investors regained much if not all of their losses
from the July sell-off as the S&P 500 broke the
psychologically significant 2000 level in August.
powered higher despite fears of Europe falling back into
recession, geopolitical conflict, high valuations and uncertainty
over the Federal Reserve's interest rates policies. Mutual fund
managers are optimistic that the forward-looking stock market is
pricing in strong economic growth. In addition, the U.S. remains
the best bet given the wild cards in the rest of the world.
SPDR S&P 500 (
) jumped 4.0% for the month, lifting its year to date return to
9.9%. The average domestic stock fund rose 3.84%, after slipping
2.72% in July, and ended August up 5.95% for the year, according
to Lipper Inc. Midcap growth funds were tops among nonleveraged
diversified funds, gaining 4.99% in August.
S&P 500 index funds, up 3.96% in the month, held their
year-to-date lead with a 9.45% return. Small-cap growth funds'
4.64% gain trimmed their year-to-date loss to 1.02%.
"The market correctly anticipated better economic activity and
earnings and jacked the multiple up ahead of time," said Mark
Spellman, a portfolio manager with Alpine Woods Capital
Management in Purchase, N.Y., overseeing $4.5 billion in assets.
He also co-manages Alpine Equity Income Fund with $81 million in
assets. "And now what you're seeing is companies growing into
Storm Clouds On Horizon?
However, breadth indicators suggest the stocks are overbought,
while value metrics scream excessive valuations. At month's end,
the S&P price-to-sales ratio regained its dot-com bubble high
of 1.77 -- its highest level in at least 60 years. At the same
time, the real earnings growth rate at 13.4% is deep below the
average growth rate of nearly 28%, indicating lackluster earnings
growth. The stock market capitalization-to-GDP ratio, which
Warren Buffett considers the "best single measure" of valuations,
hovers at nearly 124%. Although it's still a far cry from its
Internet bubble high of 148% from 2000, it's significantly
overvalued compared with a fair valuation of 75% to 90%,
according to GuruFocus.com.
"Stocks are now more than double their pre-bubble historical
norms, and presently suggest that the S&P 500 will be no
higher a decade from now than it is today," John Hussman of
Hussman Funds, wrote in a commentary Aug. 25 titled "Broken
Links: Fed Policy and the Growing Gap Between Wall Street and
"We expect the current QE (quantitative easing) bubble to
unwind no more kindly than the prior bubbles in 2000 and 2007,"
Market sentiment shows
remain too optimistic and complacent, says Brad Lamensdorf of The
Lamensdorf Market Timing Report and manager ofAdvisorShares
Ranger Equity Bear ETF (
). HDGE is down nearly 11% this year and an average annual 24.10%
the past three years.
"I find this akin to 2007 and 2000 when the next big move that
occurs is down," Lamensdorf said in an email. "Even the most
recent run (up) is on extremely low volume."
In the meantime, the stock market remains in an uptrend with
the economy growing and the Fed, while moderating its policy,
continues to be accommodative.
Sector Fund Performance
outpaced all sector funds, surging 6.77% in August and 17.29%
year to date. Precious metals and natural resources funds lagged,
losing about 1% each in August. WTI crude
slipped 2.4%, while gold bullion prices ended the month nearly
Anticipated Federal Reserve interest rate hikes and stronger
economic data lifted the dollar's value, 1.6%, to its highest
level in nearly a year, thereby depressing dollar-traded
At the same time, the U.S. had 4 million more barrels of oil
on hand midmonth than it did in the year-ago period, according to
the U.S. Energy Information Agency. Domestic production has
increased by 1.1 million barrels a day over the same period last
year, thanks to the U.S. fracking boom.
The upshot of falling oil prices is that lower gas prices goes
hand in hand with higher consumer spending, which accounts for
70% of the U.S. economy, supporting the consumer discretionary
and consumer staples sectors.
Internationally, traded Brent crude oil fell 5.0% as supply
disruption fears from the Middle East abated. Europe's high sales
taxes, persistently high unemployment rates of 11.5% and
antibusiness rules and regulations are fanning deflation. That's
bleeding through to the global economy given that Europe is the
biggest importer of Chinese goods, says Frank Holmes, CEO of U.S.
Global Advisors with about $1 billion in assets in San
Equity precious metals funds remained the leading sector year
to date with a 26.48% return. It's natural for investors to book
some profits on fears the price of gold will go down, said Dan
Neiman, portfolio manager of Neiman Funds with $400 million in
assets under management in San Diego.
Foreign Fund Performance
Latin America led global funds, rising 6.23% in the month, and
12.86% year to date. It was among the worst-performing regions
Europe funds limped in with a 0.12% gain that left them down
0.54% for the year. Fallout from the Russia-Ukraine conflict, an
overvalued euro currency and weather were blamed for the region's
economy stagnating in the first half of 2014. IHS expects Europe
GDP to grow just 0.9% this year.
"At present, the economy isn't strong enough for markets to
re-evaluate growth prospects," research analysts at Credit Suisse
wrote in a report released Aug. 22. "Nor is it weak enough to
prompt a policy response sufficient to challenge markets to
re-evaluate growth prospects."
A rise in Japan's sales tax in the second quarter led to a
steep drop in domestic demand that rippled to Europe, impacting
export growth more so than the Russia-Ukraine crisis, they
China funds ticked up 1.43% and lifted their year-to-date gain
to 4.45%. The government stimulated the economy by boosting
infrastructure spending, especially on housing, encouraging banks
to lend to small and midsize businesses and relaxing restrictions
on home purchases.
On top of that, China's stock market regulators merged trading
of A and B shares, allowing mainland and Hong Kong investors to
invest in each other's markets, said Tracy Chen, senior research
analyst at Brandywine Global, which oversees about $52 billion in
"So people are betting on the price convergence of those two
markets. B shares are trading cheaper than A shares," Chen said.
"This could be the inflection point in the Chinese equity market.
I don't think this is a temporary phenomenon."