Mutual fund investors earned modest gains in May as the stock
market defied the "sell in May and go away" script, rising for a
seventh straight month -- the longest winning streak since 2009,
when the bull market started.
The average U.S. stock mutual fund added 2.67% in May, lifting
year-to-date performance to 14.08%. The S&P was up 2.34% and
15.37% in those periods.
Investors must brace for volatility in June and the rest of
summer, analysts said. Aside from it being a seasonally weak
period, the market fears the Federal Reserve will taper its
quantitative easing programs sooner than expected, and resulting
rising interest rates threaten growth.
June marks the end of the historically "best eight months of
the year" with the stock market losing an average of 1%,
according to Stock Trader's Almanac. The firm expects a "modest
correction" in the second and third quarters this year
considering the market hasn't pulled back 5% or more this year.
The market tracker sees a bear market in "late 2013 or early
2014, when the Fed is likely to begin draining the QE punch bowl
and Chairman Bernanke likely steps down." Rising interest rates
will stymie homebuying and corporate share buybacks purchased
with cheaply borrowed money, which helped drive stock prices
higher, the firm wrote in a client note.
Fears of monetary tightening pushed benchmark 10-year
government bonds yields north of 2.1% -- a one-year high --
sending the bond market into a tailspin in May. The average
domestic taxable domestic bond fund fell 1.70%. High
dividend-paying sectors -- utilities and real estate -- that
investors had turned to for yield income, lost their allure. They
underperformed all sectors funds, tumbling 5.70% and 5.39%,
But fears of Fed tightening is overblown in the face of
slowing economic growth both in the U.S. and globally, says Russ
Koesterich, chief investment strategist at BlackRock.
"The upside to slower growth, however, is that it will likely
push back any change in monetary policy to the end of this year
or early 2014," Koesterich wrote in a client missive. "From an
investing perspective, continued easy policy will help mitigate
the downside for stocks that comes with slower growth."
Pent-up consumer demand for big-ticket items such as cars and
homes coupled with coiled demand from businesses to replace aging
equipment and software will continue to drive corporate sales and
earnings for the foreseeable future, says James Swanson, chief
investment strategist at Boston-based MFS Investment Management
with $359 billion in assets under management.
He reasons that the average car on the road is 11 years old
and eventually people will have to replace their clunkers,
thereby driving up durable goods sales. Car sales have yet to
catch up with other goods in returning to prerecession
The number of new homes being built annually remains far below
the historic average of 1.5 million a year, according to MFS. New
home construction makes up only 2.6% of gross domestic product
now vs. 4.5% on average over the past 52 years. And so the
industry has plenty of room to grow just to catch up to normal
levels, Swanson said in a conference call.
Corporations are holding historically low levels of debt all
the while using old factory equipment and out-of-date software
and computer systems, which will benefit tech companies, Swanson
said. In addition, tech stocks are trading at lower valuations
than the market.
After leading global markets this year, Japan mutual funds
sold off the hardest among foreign funds. They lost 6.69% in May,
paring their year-to-date gains to 14.07%. The average world
equity fund shed 1.19% in May, returning 5.56% year to date.
"This sort of volatility is par for the course given the
amount of central bank involvement that's moved the yen as much
as it has," said Josh Strauss, co-manager of Appleseed Fund with
$300 million in assets. He was referring to the Bank of Japan's
epic money-printing program to boost inflation and devalue the
yen, which has tumbled 13% against the dollar this year.
As a bottom-up stock picker, he has been buying "global giants
that dominate their category" with strong overseas sales and that
he believes were "unduly punished" in a broad market sell-off
just because they're based in Japan. Japanese exporters are
growing sales and earnings while improving profit margins,
Strauss said. His fund has less than 5% of assets invested in
"Viewed from a long-term perspective, Japan is still
underowned and undervalued" said James Hunt, manager of
Tocqueville International Value Fund . Some 28% of his fund's
$236 million in assets is invested in Japanese stocks.
"Japanese companies are cheap on an enterprise value-to-sales
and price-to-book basis because their profit margins and returns
are not as good as they should be and not as good as comparable
companies in the U.S.," he wrote in an email.
"So there is a huge opportunity for corporate management teams
to create value by improving profit margins and returns," he
added. "Furthermore, most Japanese companies have large net cash
positions, which means there is a big opportunity to create
shareholder value through stock buybacks and dividends."