The second quarter was unkind to investors' stomachs. Stocks of all sizes and sectors finished the three-month period ending June 30 in the red. After witnessing a multi-worry pileup -- Greek debt troubles, a devastating oil spill, an unshakable housing slump and a job market that won't budge -- investors retreated from the market in search of safe investments such as Treasuries and gold.
"Every day it's just bad, depressing news," said David Chalupnik, head of equities for First American Funds Advisors.
Among mutual funds with Minnesota ties, bond funds mostly ended in positive territory, with long- and intermediate-term bonds, inflation-protected bonds and municipals leading the way.
Stock funds were a horror story. Aside from Leuthold Weeden Capital Management's Grizzly Short Fund, designed to prosper when equities don't, and the RiverSource Precious Metals and Mining Fund, stock mutual funds had a depressing quarter. Small value, large growth, around the globe, most categories of equities were down close to 10 percent or more. Foreign stocks brought up the rear with losses of about 13 percent, according to numbers from Morningstar.com. The same is true if looking at the year-to-date period as well.
While some Minnesota stock funds fared better than their benchmarks, as Roger Sit, global chief investment officer of Sit Mutual Funds, puts it: "Investors can't buy groceries with relative performance. Anytime we're negative is not good."
April started off on a promising path. Market momentum continued upward as the homebuyer tax credits helped with home sales and investors who were waiting on the sidelines started to trust the bull market. That changed in May.
"I think people realized that the financial strains remain very much just under the surface," said Tom Galvin, fund manager for Columbia Select Large Cap Growth Fund (Columbia is a subsidiary of Minneapolis-based Ameriprise Financial). "I think there's been some recognition now that this economic recovery both in the U.S. and abroad remains constrained," he added. An alarming but temporary 1,000-point drop May 6, dubbed the "flash crash," didn't help matters.
Doug Ramsey, director of research at Leuthold, said their tactical asset allocation funds started the quarter with 67 percent invested in equities, a number that never goes above 70 percent. They scaled that back by a few percentage points in mid-April.
"The optimism had finally really caught up with the stock market," he said. Today, the funds are about 60 percent invested in stocks, and Leuthold's major trends index, which the firm uses as a guide for investment decisions, is throwing out signals that stocks may face more challenges ahead.
Ramsey, however, isn't convinced. "I suspect it's still just a serious correction that will rebound in the second half. Right now, in terms of economic data, we've certainly hit a soft spot, especially on some of the employment numbers, but we hit those soft spots to a much more significant degree in '02 and '03 and '92 and '93 during those recoveries and the market was able to shrug it off and power higher."
Consumers need confidence
Chalupnik expects second-quarter company earnings will look pretty good, but he's not sure that will matter.
"The stock market isn't being driven by individual company earnings. It's really being driven by the macro-environment today."
Stocks need consumer confidence, which Ramsey describes as "the only thing that causes a manager to take on a new employee, or for a family to bite the bullet and buy a house and take on a new mortgage."
What will it take? Jobs. Home sales. Economic growth not just here, but around the globe.
Until then, most managers say large, quality stocks are the place to be when talking equities.
"Valuations are attractive again. Three months ago, valuations were very concerning to me," Sit said. He likes large, growing companies with exposure to Asia (minus Japan) and parts of Latin America.
Noting lines around the block for the iPhone, Galvin likes stocks of technology companies that create in-demand products as well as health care companies that treat medical conditions such as diabetes. Ramsey thinks large, U.S. multinationals are cheap and pay decent dividends. He'd shy away from emerging markets.
"Be careful about the emerging market's promise that superior GDP growth will translate into superior stock market performance. The long-term research we've done doesn't necessarily show a high correlation," he said.
Betting that economic recovery, while taking its own sweet time, is coming, Chalupnik is sticking with cyclical stocks that do well during periods of economic growth, such as consumer discretionary stocks.
But given the volatile times and the rawness that remains from the painful losses in 2008 and early 2009, most experts suggest average investors stay in the market, but be well-diversified. "For you to try to time the market bottom to jump back in, you have to be pretty nimble," Sit said.
Kara McGuire • 612-673-7293