Domestic Equity Funds -- July 2004 Review

Aug. 2, 2004 — As the bull market moves halfway through its second year, investors are becoming cautious, pursuing more established and dependable market segments and gravitating to larger-cap, high-quality value stocks.

The market “is doing what we think it should be in the current economic and earnings cycles,” says Sam Stovall, chief investment strategist for Standard & Poor’s. With earnings decelerating, investors are gravitating to dividend-paying stocks that are trading at reasonable valuations, he noted.

July results for domestic equity funds mirror these market moves, with value offerings holding up better across the market capitalization categories, and larger caps faring better than smaller caps. Large companies tend to outperform in rising rate environments, and their global operations generally benefit from a weak dollar, noted Rosanne Pane, Standard & Poor’s mutual fund strategist.

Traditionally, third quarters also suffer from a few negatives, Stovall said. Unlike the start and the end of the year, when investors add to their 401(k)s and IRAs, and unlike in April, when tax refunds roll in, third quarters don’t have a dependable infusion of cash, he noted. Also, trading volume tends to be lower in the summer, limiting market gains. The adage “Sell in May and walk away” appears to be holding, according to Stovall.

Indeed, bearish tendencies in third quarters also seem to have reinforced pessimism already in the market. The pessimism stems from several unfavorable trends, including terrorism, the war in Iraq, uncertainty about the presidential election, high oil prices, and rising interest rates. Domestic equity fund results show the downsides of such bad news. The average U.S. domestic stock fund lost 1.12% so far this year, including a 4.9% drop in July.