If you like the odd couple, May was your kind of market. A mix of technology stocks and defensive sectors outperformed. The tech stocks were driven by secular themes that seem able to keep growing even if the overall economy's growth is tepid.
The S&P 500 gained 1.41% last month while U.S. diversified stock mutual funds inched ahead by a more modest 0.38%. Global science/technology funds and science-technology funds led sectors, advancing 5.88% on average and 4.69% respectively.
Other leading sectors were more defensive. Utility funds gained 3.43% and international real estate funds tacked on 3.12% . Consumer goods funds also did well, growing 2.00%.
"The technology sector did well because of across-the-board interest in cell phones, mobile devices and software," said Bernie Horn, a manager of $431.8 million Polaris Global Value Fund ( PGVFX ), an IBD Best Mutual Fund Awards winner , having outperformed the MSCI EAFE over the past one, three, five and 10 years that ended Dec. 31.
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Some cloud computing leaders also added to tech's showing. Microsoft ( MSFT ) and Amazon.com ( AMZN ) posted gains. "They are growing their cloud services dramatically," said David Chalupnik, head of equities for Nuveen Asset Management.
IBD'S TAKE:Amazon has a solid 97 Composite Rating. It posted a 32.1% earnings surprise last quarter. See how its additional easy-to-understand fundamental and technical data stack up against rivals' at IBD's Stock Checkup .
Investors Were Debating
Defensive sectors also did well as investors sought safety amid doubts about the strength of economic growth. "The market was having a debate," Chalupnik said. "Investors aren't sure which way the economy is headed. The economic numbers that (came out) in May were mixed. The employment number was OK, but retail sales were a little light. The CPI (inflation rate) number was low for the second month in a row." That last item is a sign that the U.S. economy is not heating up very fast.
Precious metals funds, a defensive group, inched up 0.34% due to investor jitters over Washington, D.C., Horn said. "The weekly hysteria over Trump comments regarding Russia tends to make some people think that the Federal Reserve may not be able to increase rates as expected," he said. "That puts monetary policy into flux, which usually drives money into precious metals."
Large-cap growth funds gained 2.87%, leading U.S. diversified stock mutual fund categories.
World equity funds easily topped U.S. stock funds with a 2.92% gain.
Taxable bond funds inched up 0.64% on average. Tax-exempt funds tacked on 1.20%.
What's Ahead
Going forward, Horn expects stock markets to benefit from improving economic growth and diminished political drama. "Notwithstanding political volatility around the world, underlying economic growth is slowly increasing," Horn said. "And there's less of the uncertainty that was holding back individual and corporate spending. The U.S. elections, Brexit (the initial decision), the French election - all are in the past. The U.S. market has seen valuations rise. But outside the U.S., there are lots of great values."
Magna International ( MGA ), a Canada-based maker of car and truck parts, is one such name he likes. "In an environment where competition among parts suppliers has been reduced, surviving companies like this are well-positioned to provide components whether the world goes electric or not," he said.
And he still sees U.S. stocks that he likes. " Quest Diagnostic ( DGX ) is the largest provider of medical tests in the country," Horn said. "They're doing a better job of creating efficiencies in their operations, keeping costs in line."
He also likes NextEra Energy (NEE). "It's one of the best-run utilities in the country if not the world, with a strong presence in clean fuels like natural gas and wind and solar to a lesser extent. It's not the cheapest stock, but management makes continuous improvements in their cost structure."
Horn also expects health insurers and managed care providers Anthem (ANTM) and UnitedHealth Group (UNH) to benefit from the reduction of regulatory burdens of any arrangement that replaces or reforms ObamaCare.
Chalupnik sees potential for better growth from key foreign markets than the U.S. Europe, China, Japan and emerging markets are growing at decent rates, he says. "The whole global economy is growing together," he said. "It's the first time since 2010 that you could say that."
Faith In Energy
His team has overweights in materials and industrials relative to the S&P 500, although it has trimmed its overweights. It has held its energy weighting steady.
Detroit Edison (DTE) illustrates his appetite for energy. "People and businesses still need electricity," he said. "It is a very well run utility. It has good management, a good regulatory environment. It delivers quarter-in, quarter-out." In addition, the stock has a 3% dividend yield.
He also likes Wal-Mart Stores (WMT). "It's a very stable company, probably the next big growth company out there. It's one of the few retailers that's growing same-store sales. And its e-commerce business is tremendous. And it's trading at an attractive multiple."
Share price is up 15% so far this year, including a 5% gain in May. But the stock has a weak 59 Composite Rating from IBD, on a scale from 1 to 99.
Douglas Burtnick, a manager of $1.8 billion Aberdeen U.S. Small Cap Equity (GSXIX), an IBD Best Mutual Funds Award winner for topping the S&P 500 over one, three, five and 10 years, likes Ellie Mae (ELLI). "They sell software and services to banks, which help them create more efficiency around the mortgage origination process," he said.
Ellie Mae's systems are helping to transform what has been a paper-oriented industry into a digitally focused one. "That makes the process faster and easier," Burtnick said. "Banks are willing to pay for that efficiency."
And Chalupnick likes the outlook for Lamb Weston (LW), a producer and distributor of frozen foods that was spun out of ConAgra (CAG) late last year. "It is a relatively new company, and it is under-followed," he said. "They are one of the few packaged-goods food companies that is growing its unit volume. General Mills unit volume is down (in its North American retail segment)."
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
