Market takes investors on a wild ride
Jitters in Shanghai jangled markets worldwide last month – a wake-up call for investors to keep a closer eye on the downside.
from the April 9, 2007 edition
Page 2 of 3
Ron Sorenson, chief investment officer of W.H. Reaves & Co., credits the utilities sector's strong performance over the past three years to investors' quest for higher-yielding stocks. Though dividend yields are now below 3.5 percent for most gas and electric utilities, these asset-intensive companies have steadily upped their payouts and are expanding their power and transmission infrastructure under supportive regulatory oversight. Financial-services funds, hit by the fallout from real estate woes, were the only sector to finish the quarter in the red.
Investor awareness of elevated risk is reflected in the way money has flown into mutual funds, says Lipper senior analyst Jeff Tjornehoj. Money has been pouring into high-grade bond funds lately as well as into the more conservative equity income and asset allocation funds. Enthusiasm for world equity funds remains higher than that for their domestic counterparts, he notes, but the once torrid pace of flows into emerging markets has ebbed considerably.
Among pure stock funds, multi-caps have been "king of inflows" says Mr. Tjornehoj. People prefer the "go anywhere" nature of multi-caps, he says.
The five-year-long performance disparity between large- and small-cap stocks has many analysts scratching their heads. Large-cap stocks typically outdo small-cap stocks in the later stages of a cyclical bull market, but large-cap stocks have yet to strut their stuff. During the quarter, large-cap core funds rose 0.5 percent, trailing small-cap core funds' 2.8 percent rise. "It's still a tug of war between the large and small caps," says S&P analyst Massimo Santicchia. With good credit conditions, hedge funds with an appetite for risk, and brisk merger activity, many small company stocks can prosper, he says.
With profits growth sputtering, the best long-term values are in the large-cap arena, says Michael Maubousin, chief strategist for Legg Mason Capital Management. Companies such as General Electric and United Technologies have greater exposure to global growth and pricing power than small companies do, he says. They also benefit from an upswing in US exports, aided by a weaker US dollar. Large-cap growth stocks are "statistically cheap when compared to large-cap value stocks," agrees Eric Bjorgen, senior analyst with Leuthold Group in Minneapolis. "But you need to see more positive sentiment toward the healthcare and technology sectors before growth funds forge ahead."
Investors need to keep a sharp eye on the financial-services sector, which is close to 25 percent of the total market capitalization of the S&P 500, analysts say. "Banks face their toughest environment in five years," says Lester Satlow, portfolio manager with Cabot Money Management. "Consumer loan growth has peaked, lending standards on mortgages are tightening, and credit quality is deteriorating. In 2006, the financial sector provided more than one-third of the S&P 500's earnings growth. It won't be nearly "the same kind of earnings engine" this year, he says.
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