Up from the abyss
For stock mutual fund investors, the first quarter of this year had been looking a lot like the fourth quarter of last year: an Acapulco cliff dive.
But this time around, the equity market landed on a trampoline. Since blue-chip indexes including the Dow Jones industrials sank to 12-year lows March 9, the market has rebounded for five straight weeks.
The comeback dramatically pared stock fund investors’ first-quarter losses, turning another catastrophe into a mere extremely painful pummeling. The average domestic stock fund lost 8.2% in the quarter ended March 31, according to investment research firm Morningstar Inc.
By contrast, at the market’s lows last month the loss for the new year had been about on par with the fourth quarter’s devastating collapse of about 22%.
The numbers have just gotten better with the start of the second quarter, as stocks have continued to rally. The average domestic stock fund’s loss had been trimmed to 1.8% by the end of last week.
Is the bear market over? Your guess will be as good as that of any Wall Street veteran who never saw what was coming down the pike last year.
If you’re looking for reasons to be hopeful, the best news contained in the performance data for stock mutual fund sectors in the first quarter was that investors became far more discerning about what they bought and sold -- unlike in the fourth quarter, when they sold just about everything at the same blistering pace.
Technology-stock funds mustered a 4.2% average rise last quarter. As a classic growth sector, tech’s advance suggested that some investors were looking ahead to better economic times.
Latin American stock funds eked out a modest gain, reflecting surprising strength in the Brazilian market and economy, in particular. Brisk rallies in China, Russia, South Korea and some other emerging markets also helped hold the average diversified emerging-market fund to a 1.8% average loss in the quarter, offsetting crumbling markets in regions such as Eastern Europe.
At the bottom of the performance chart, the horrendous 30.2% dive in real estate funds -- even after a 40% plunge in 2008 -- showed investors’ deep-seated fear that the housing market debacle would segue into a commercial real estate crash that would obliterate many real estate investment trusts.
We’ve all been taught that the stock market will anticipate an economic recovery by six months or so. That may be what the latest rally is about -- or it could just be another temporary bounce, like the four previous ones since the bear market began in October 2007.
Federal Reserve Chairman Ben S. Bernanke last month talked about seeing “green shoots” in the financial system, in the wake of the central bank’s unprecedented efforts to get credit flowing again. Bankers claim they’re lending again. Millions of homeowners are refinancing their mortgages at record low rates. And major firms have been able to raise cash via bond sales this year.
But even if the financial system is on the mend, the damage to the economy remains severe. The latest government data suggest that, at best, things aren’t getting worse at a faster pace.
And from stock investors’ viewpoint, even if signs of economic recovery become clearer, the question will be: What kind of recovery is possible? A weak one that feels much like an ongoing recession may not inspire investors to push share prices significantly higher, if at all.
If you’re trying to weigh all of this to decide what, if anything, to do about your nest egg (or what’s left of it), here are four thoughts that may be helpful right now, with stocks reviving:
* Would you ever really want to be out of the market altogether? The happiest investors for much of the first quarter were those who got out of equities entirely in 2008. But now, as shares climb, they’re being tortured, wondering if they’re missing the beginning of a new bull market.
The disgust level with Wall Street is high, no doubt. But if you’re out of the market altogether -- not even keeping, say, a 20% holding -- you’ll face these doubts every time there’s a rally.
Kurt Brouwer, a principal at financial advisory firm Brouwer & Janachowski in Tiburon, Calif., says he’s trying to get his clients to look ahead five years with their money. With major stock indexes still down 40% to 50% from their 2007 peaks, “If you have a long-term horizon, this is a target-rich environment,” he says.
For many cautious investors, bonds are the asset of choice at the moment. They’re definitely safer than stocks, for the most part.
But if you don’t expect the planet to revert to a hunter/gatherer primitive society in the next five years, and you anticipate some growth in that period, can you really stand to give up on stocks?
* Do you know what your funds own? If you’re searching for a reason to sell, buy or stay put with a fund, take the time to look at the stocks in the portfolio. You may be surprised at what you find.
“When clients are nervous, I show them the top holdings in a fund,” said Jim Freeman, head of advisory firm Financial Alternatives in La Jolla. That, he says, makes them stop and think about the firms they own, as opposed to focusing on an otherwise faceless portfolio.
If you look through to the underlying companies in your funds, you may also get a better sense of whether a fund is positioned for the kind of economic recovery you expect. Funds often list their largest holdings on their websites. Or check your latest quarterly report.
* Could your stock portfolio use more diversification? If the market has stopped cliff-diving, diversification should mean something again; in the fourth quarter, it meant little, as nearly everything collapsed.
As noted earlier, we already saw in the first quarter that some market sectors zigged while others zagged. If you’ve been waiting to further diversify, this could be a smart time to make some portfolio shifts.
Case in point: The plunge over the last year in commodity-related funds, such as natural-resources funds, could make them appealing to investors who like the long-term growth story for raw materials, said Russ Kinnel, director of fund research at Morningstar.
* Remember: The tax man may be kept at bay for a while. Many stock funds realized heavy losses over the last year, of course. The good news is that those losses may be used to offset future gains if the market keeps climbing.
That means if you own a fund in a taxable account, you may be spared those annoying capital gains distributions for some time to come. Instead, any portfolio gains would build up in the share price.
This is typical after a bear market. But as Kinnel notes: “Funds aren’t going to promote it because they don’t want to call attention to their losses.”
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