Will the bull market survive the storm?
Investors eked out modest gains last year, but now ill economic winds are whirling through Wall Street.
from the January 7, 2008 edition
Page 2 of 3
The stock market in 2007 displayed a decidedly "split personality," says David Nelson, investment strategist at Legg Mason Capital Management in Baltimore. "Strategies based on price momentum and steady earnings growth worked exceptionally well. But value-based approaches – picking the statistically cheapest stocks – failed miserably."
Simply emphasizing the S&P economic sectors with the highest percentage of foreign sales would have yielded superior returns, according to Nelson. The energy, information technology, and materials sectors of the S&P 500 index, for example, consist of companies that earn more than one-third of their revenues outside the United States. Stocks in each of these sectors posted gains averaging 15 percent or more last year.
"If you stayed with large-cap names and avoided financials and consumer stocks related to discretionary spending," adds Les Satlow, money manager at Cabot Money Management in Salem, Mass., "you had a decent year."
Growth funds topped the winners' list with mid-cap growth funds scoring a hefty 16.5 percent rise. Large-cap growth portfolios, market laggards for the past six years, also shone with a 14.2 percent rise. Value funds of all sizes lagged badly.
Renewed risk aversion hurt most funds with small-cap mandates, whose portfolios sported relatively high valuations after five years of double-digit gains.
For the sixth year in a row, globally oriented investors were handsomely rewarded Despite a fourth-quarter setback, world equity funds climbed 16 percent. Hot Asian and Latin American markets benefited emerging-market funds, which soared 36.4 percent in the wake of brisk economic growth in countries such as Brazil, China, and India.
International funds derived a large part of their returns from a sagging dollar. In 2007, the greenback fell in value against 14 of the 16 most actively traded foreign currencies including a 10 percent drop against the euro, according to Federal Reserve data.
Natural resources sector, multinationals did well
Among specialized offerings, the natural resources sector was again a big winner, advancing 39.6 percent. Record high oil prices, coupled with brisk demand for industrial metals and agricultural commodities among fast-growing Asian nations, especially China, buoyed the funds.
Still, the prospect of slower global growth has curbed some analysts' enthusiasm for natural resources after a prolonged advance. A growth pause in China, the result of tightening Chinese monetary policy, could exert downward pressure on commodity prices, according to Nicholas Michas, investment strategist for Alexandros Partners in Waltham, Mass. "That could also put a damper on other emerging markets' as well," Mr. Michas says.
Investors' preference for large-cap stocks with multinational reach is likely to persist for some time, analysts say. "We've entered a multiyear growth-stock cycle with large-cap stocks likely to dominate," says Cabot's Mr. Satlow. Many foreign economies are growing more robustly than the US, and multinational firms are more likely to post more consistent earnings and raise dividends regularly than those linked solely to the US market.
RSS feed
