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June 06, 2005 at 08:00 PM
Following dismal April performance, domestic equity funds snapped back in May from downward pressure in first four months of the year. The average domestic stock fund advanced 4.5% for the month, versus a 3.0% gain for the S&P 500.
All fund style categories ended May in positive territory. Small-cap growth funds were the brightest stars, returning 6.5% on average for the month, while large-cap value funds trailed, but with a respectable 2.6% gain. Year to date, growth funds actually started to outperform their value counterparts for the first time, gaining 5.6% on average as of May 31, versus value funds’ 3.9% average return. Market sectors helping to boost monthly performance for funds were technology and consumer discretionary, which both posted strong gains.
At the top of this month’s review were a number of index-tracking funds, which seek to provide investment results that correspond to twice (200%) of the daily performance of benchmarks such as the Nasdaq-100 index. These funds employ leveraged to magnify gains and losses, resulting in greater volatility and risks, especially when the indices they track are concentrated in specific sectors such as technology. ProFunds:UltraOTC/Iv (UOPIX) gained 17.6% an outsized in May, as did Rydex Dynamic Funds:Velocity 100 Fund/H (RYVYX). Both track the Nasdaq 100.
May marked a sharp turnaround in almost all areas of the equity markets, noted Sam Stovall, Standard & Poor’s Chief Investment Strategist. “The defensive tone the market had been adopting since the beginning of the year was exchanged for a more optimistic one as investors felt the Fed was close to ending the rate tightening policy,” he said. Projected slow downs in global economic growth, the lack of inflation seen by recent CPI figures, energy prices averaging $50 per barrel, and the low yield on the 10-year note indicated investors were not too worried about the long term impact of inflation, he added.
Investors may mistake May’s performance as a shift to bullish from bearish, but Stovall believes neither the 5.8% year-to-date decline for the S&P 500 through late April, nor a March-only economic soft patch, should be construed as a either a bear market or recession. The month of May was a counter trend rally, Stovall explains, where “investors used good news as a reason to temper their bearishness and cancel out short selling contracts. But May has not reset the clock on how old the economic expansion/stock market advances are.”
