Lace up, and run easy
For a new year, investors might want to pace their expectations. 'Winning' means finding solace in slow and (perhaps) steady gains.
| NEW YORK
Welcome to 2003, which looks like the year when the US stock market gets back to doing what it does best: Posting some earnings for investors.
Of course, 2002 also looked that way initially, which may be grounds for staying wary again this year. And the last weeks of 2002 went out with a fizzle for investors. Where, oh where, did the usual "Santa Claus Rally" go? Certainly not into stocks!
Alas, when the fourth quarter of 2002 ended, the market was once again down for the year. It's the first time since 1939-41 that the benchmark Standard & Poor's 500 index has fallen for three straight years.
Pummeled by sluggish domestic growth, corporate scandals, rising unemployment, and apprehension about war, the stock market could not overcome investor risk-aversion enough to pull itself together. Still, as bad as the year was, the fourth quarter showed a little spunk - at least up to its tail end.
In fact, many stock mutual funds rebounded during the fourth quarter, outperforming bond funds, according to analysis by information firm Lipper Inc. And most surprising perhaps, growth funds made a comeback, outperforming value funds.
Value funds, which invest in companies with inherent, often hidden, worth at low prices, had been the better of the two fund types during the past several years.
Still, the gains posted by some equity funds during the fourth quarter were not enough to offset market losses during the year, according to Lipper. That meant that for the year as a whole, most equity funds bled red ink, in many cases posting double-digit losses.
The only one of the 40 largest US equity funds to make money in 2002 was American Funds Capital Income Builder. A hybrid fund, it carries a large position in bonds.
One result of the lackluster results: Investors continued to pull money out of equity funds. Despite a November inflow of $6.46 billion, stock funds experienced a net outflow of $19.87 billion for the year through November, according to the Investment Company Institute, a trade group in Washington. The last full year during which stock funds had net outflows was 1988.
Telecommunications and science and technology funds fared best in the last quarter - 23.6 percent and 17.6 percent, respectively. For 2002 as a whole, only gold (62.9 percent) and real estate funds (4.1 percent) were winners, with the risky precious metal funds running well ahead of the pack.
Bond funds continued to be solid performers, both for the quarter and longer term (about 6 percent for the year). Yet many experts now believe that bonds funds could be in for some rough patches, since interest rates could well be moving back up this year as the economy regains traction (see story).
And the story for stocks? "We're expecting an up year in 2003, with a gain for the S&P 500 of around 15 percent," says Arnold Kaufman, editor of "The Outlook," a financial review published by Standard & Poor's Corp.
"Corporate profitability is looking better; interest rates, for now, remain low, and there is a lot of money on the sidelines that could be committed to the stock market," Mr. Kaufman says. For the moment, however, Kaufman is hedging his somewhat upbeat mood by "staying with defensive stocks," such as consumer staples including Procter & Gamble, Clorox, and Mohawk Industries.
"Iraq remains a huge burden for the stock market," says Bryan Piskorowski, a market commentator with Prudential Securities Inc. "But the market tends to rally when military action commences."
Chuck Kadlec, managing director and chief investment strategist with mutual-fund firm J.&W. Seligman in New York, believes that the most important decision an investor can now make is choosing the right mix of stocks and/or bonds. His clear choice for new investment: stocks. "They are looking very attractive relative to bonds," he says.
Mr. Kadlec believes that government tax moves, including action to curb the double taxation of dividends (see story), could be substantial pluses for stocks. But he also worries that if the economy is not boosted enough to reduce unemployment, there could be lingering doldrums for the market.
Kadlec's personal preference among equities: small-cap stocks, which tend to make advances in the early stages of an economic recovery, as well as the initial months of a new year.
Still, should investors trust that the economy will lift itself enough to let them shift back into equities soon? Many analysts say yes - albeit cautiously.
"I don't think investors should wait around for a recovery. If they do, they might actually miss out on the rising market," says Peter Di Teresa, who heads the private-study program at Morningstar Inc., the financial information firm in Chicago. "There are so many good fundamentals now pointing to some form of market recovery," Mr. Di Teresa says. "Economic reports have been good, the US economy is no longer in recession, and interest rates remain low."
Still, he says, "investors should go back into the stock market at their own comfort level." For most investors, the best strategy would be to "dollar-cost average back into stocks," Di Teresa says, putting in small amounts over several weeks or months, through an index fund linked to the S&P 500 or a total-market fund.
"It is also time to rebalance your asset allocation, since many investors are now overweighted in bond funds," he says.
Still, not all analysts are overly sanguine about the first quarter of 2003 - or the year, for that matter. "I'm hopeful that this year will be better for the stock market," given improving fundamentals, says James Stack, who publishes InvesTech, a newsletter in Whitefish, Mont. "The next three months, however, will be critical."
On the plus side, he notes, this is the third year of the four-year election cycle for President Bush. Traditionally the third year is the best in the cycle for the stock market. Also, the months from November through April tend to be the strongest for stocks.
But Stack remains wary. "If the market hits new lows in the weeks ahead, this would be a clear signal that we may be heading back into a double-dip recession," he says. "If we fail to see the market rally by the end of January, build your cash position."
Investors return to market in November
After five consecutive months of pulling more money out of stock funds than putting money into them, fund investors warmed up to Wall Street in November. A net new-cash inflow of $6.5 billion dollars helped awaken the slumbering stock market.
Yet even if inflows remain positive in December, analysts expect 2002 to be the first year of net cash outflows for mutual funds since 1988.
Last week, fund-tracking firm Morningstar Inc. announced its "fund managers of 2002" in the US stock, foreign stock, and fixed-income categories. The Chicago firm has given out the awards for 16 years. But what makes this year different: For the first time, two of the three winners posted negative returns. The winners:
Joel Tillinghast, manager of the of the $15.5 billion Fidelity Low-Priced Stock Fund. Mr. Tillinghast has managed the fund since its 1989 launch. Although the fund had a return of minus 6.2 percent in 2002, its first-ever annual decline, it still beat the minus 16 percent return for its average peer in the small-cap blend category.
Rudolph-Riad Younes and Richard Pell, managers of of the $833 million Julius Baer International Equity Fund. In 2002, the fund had a return of minus 3.6 percent, compared with the average foreign stock fund's return of about minus 16 percent. Over five years, the international fund outperformed its average peer with a return of 10.5 percent.
The 11-member management team behind the $1.9 billion Dodge & Cox Income Fund. This was the only Morningstar winner with positive returns in 2002, bringing in 10.8 percent, which beat its average peer in the intermediate-term bond category by 2.9 percent.