Fifteen months into the bear market, U.S. stock funds continued bleeding after a Santa Claus rally respite, while the major indexes kicked off the year with the worst January returns in their history.
White-hot U.S. Treasuries sold off dramatically, experiencing their worst drop in five years, on fears of the ever-growing federal deficit heating inflation and ebbing foreign demand, especially from China. Conversely, high-yield and municipal bonds rallied.
U.S. diversified stock funds on average plunged 7.03% in January, wiping away a 2.8% uptick in December, according to Lipper Inc.
Short-selling funds, which make money from falling stock prices, returned 10.45%. They're the only stock group to book gains on a longer-term three- and one-year basis, up 5.26% and 26.48%, respectively, over those periods.
Growth funds trumped value in all size categories by a wide margin. Large-cap growth shed 4.6% vs. a 9.54% loss for large value.
Midcap growth sank 4.79%, while its value peer receded 8.15%.
Small-cap growth sagged 7.10%. Small-cap value, the worst-performing group, tumbled 11.01%.
The outperformance of growth over value stocks was primarily due to large drops in financials and positive earnings reports from health care and technology companies, said Paul Alan Davis, manager of the Schwab Core Equity (NASDAQ:
The in-house Schwab Equity Ratings model that Davis uses to pick stocks currently shows good ratings in small caps and midcaps, health care, energy and consumer staples.
"With all of the uncertainty about the economy and the net effect of the stimulus plans, we are positioning the funds for an extended slowdown and a slow economic recovery," said Davis, who oversees $4.7 billion in assets.
In anticipation of high volatility, Bart Geer, manager of Putnam Equity Income (NASDAQ:
"We're buying on weakness and selling on strength on a stock-by- stock basis," said Geer, who manages $2.5 billion in assets. In a volatile market environment, "the opportunities come faster, and frankly they're bigger," he said.
Geer overweighted the fund in health care with a large stake in Amgen (NasdaqGS:
Thyra Zerhusen, portfolio manager to the Aston/Optimum Mid-Cap (NASDAQ:
She recently pumped up positions in FMC Technologies (NYSE:
The Dow slid 8.84%, while the S&P 500 dropped 8.57%, booking the worst January in its 81-year history. The Nasdaq skidded 6.38%.
"The market is effectively discounting a 40% to 50% decline in S&P 500 earnings, so a considerable amount of the negative fundamental outlook is already reflected in its valuation," said Todd Lowenstein, co-manager of HighMark Value Momentum (NASDAQ:
With 22% of the companies in the S&P 500 having reported fourth-quarter results, earnings have fallen 34% year over year, according to Thomson Reuters. In Q3 2008, the S&P's earnings slid 19%.
Full-year '08 earnings are forecast to fall 12.5% and drop 7% in '09.
Earnings estimates forecast declines of 22.1% for the first quarter, 19.9% for the second quarter and 5.2% for the third quarter. Analysts see a fourth-quarter rebound with growth of 59%.
"We are approaching an environment," said Zerhusen, "in which a company can report decent earnings and not lower their outlook, and the stock's price will actually reflect that good news ... as opposed to October and November, when positive news seemed to have little to no effect on the markets."
Such reactions add to evidence that the market has bottomed, she says.
The proportion of companies missing earnings forecasts has flown to a 10-year high. Meanwhile, the speed and magnitude of downward revisions has surpassed those of the last two recessions, according to a Merrill Lynch investment strategy report.