Many investors are glad to see June, and perhaps the entire second quarter, come to a close. Bill Gross, the famed “bond king” of Pimco, is probably among the happiest to see it go. His Pimco Total Return fund, which happens to be the world’s largest mutual fund, just posted the worst 2-month performance figure in its 26-year history.
As tough as things were for bonds and bond kings in the second quarter, they had a cakewalk compared to emerging market equities and precious metals. Emerging market stocks dropped more than 8% as Latin America plunged more than 14%. Gold grabbed the headlines, and its nearly 23% devaluation for the quarter was the reason. Although gold got most of the attention, silver suffered even more, erasing more than 30% of its value. Precious metal mining stocks often behave like a leveraged investment in the underlying metals. The second quarter was no exception as the leading mining ETF, Market Vectors Gold Miners (GDX), plunged more than 35%.
The quarter would have been much worse if the members of the Federal Reserve had not come out in force in the waning days of June to calm investor fears. In speech after speech, they did their best to convince market participants that the $85 billion in monthly bond purchases were still taking place and would likely continue for many more months. This Fed “hand-holding” operation was required to repair the damage inflicted on the market after Chairman Bernanke spoke on May 22 and again on June 19. Seems investors misunderstood the message the Fed actually wanted to convey.
As the third quarter gets underway, it seems political risk is once again destined to be a topic. Employer penalties for not providing employee health care coverage under Obamacare have been delayed a year, as the administration admits it is behind in implementing many of the legislation’s requirements. Budget, sequestration, and debt ceiling discussions have been mostly absent this past quarter but are ripe for return.
Speculation surrounding Bernanke’s possible departure in January and his absence from the Jackson Hole confab in August also have a high probability of being market-moving events in the months ahead. I was asked in an interview this week to give my prediction as to which sectors would perform the best in the third quarter. I answered honestly that no one knows at this time, but I could tell him what’s working now. The interviewer seemed disappointed in my answer. Apparently, honesty does not make as interesting reading as wild guesses. It’s probably safe to predict that I will not be quoted in that article.
First place Consumer Discretionary widened its lead over all other sectors this week. All discretionary segments seem to be holding up well despite the macroeconomic concerns. Financials jumped ahead two spots to retake second place as many analysts believe the steepening yield curve will boost bottom lines. Health Care and Industrials both slid down a notch. Telecom, Consumer Staples, Technology, and Energy all flipped from negative to positive momentum readings this week. The bottom three categories of Utilities, Materials, and Real Estate remain in the red.
All Style categories are sporting positive trends today, which is a big improvement from a week ago when six were negative. Additionally, we’re starting to see a large dispersion in the momentum readings between the top and bottom of the list, indicating that selection is becoming important again. Typically, large blue-chip stocks perform the best amid market pullbacks and investor skittishness. However, quite the opposite has been true lately with Micro Cap and the Small Caps rising to the top while Mega and Large Caps sink to the bottom.
Japan surged back to the top of the Global rankings today. Japan held first place honors for most of the year, until stocks took a dive in late May. Much of Japan’s positive market performance this year is the result of the falling yen, which helps the country’s export-driven economy. Countertrend moves of falling stocks and a rising yen combined for a steep correction, but the previous trend now seems to be returning. The U.S. slipped to second, although it managed to join Japan with a positive reading today. The other nine Global categories all improved since a week ago even though they remain in negative trends. China and Latin America have both been unsuccessful in their attempts to turn things around. Eventually they will, and when that occurs, it will present wonderful buying opportunities.
“One flag, one land, one heart, one hand, One Nation evermore!”
Oliver Wendell Holmes
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