Fund investors continued to be rewarded in August by a defiant stock market.
The question is how long stocks can continue to thrive with so much uncertainty. Market declines late last week, headed into the Labor Day weekend, could be either an omen or a blip.
The average U.S.-stock fund posted a total return of 5.5% in August, according to Refinitiv Lipper data, to push them into the black for the year to date, at 3.6%. International-stock funds were up 4.7%, but are down 1% so far this year.
“I think August was pretty incredible in light of a normally low-volume month, and the market performance has just continued to surprise people on the upside,” says Linda Zhang, senior adviser to financial-tech startup SoFi and chief executive of Purview Investments in New York, a firm specializing in global and sustainable investing.
“Many people are worried if the market is ahead of itself,” says Dr. Zhang. “But if history is any guidance, the real economy and capital markets are not necessarily in sync, especially during dramatic economic developments,” such as in 2008-09, she says. “So, we’ll probably see history kind of repeat itself, where the two sides—the real economy and markets—are not in sync, and might continue to be so for some time.”
Many investors are turning to the relative safety of bonds. Funds tied to intermediate-maturity, investment-grade debt (the most common type of fixed-income fund) slipped 0.50% in August but are up 6.8% this year.
Scoreboard
August 2020 fund performance, total return by fund type.
Dr. Zhang notes that there is a rising risk of sector rotation. There has been a great divide between the best and worst stock-market sectors this year. For example, though tech stocks have sold off the past two sessions, the tech sector’s performance was recently at 70 percentage points above the worst sector, fossil-fuel energy. That best-to-worst spread is one of the largest she has seen. Looking back 20 years, the average spread between the best and worst sector is about 9 percentage points in performance a month, she says.
When sector rotation happens, when tech loses leadership, what will be the next sector to thrive? “That’s something that nobody will know for sure. Some industries may experience a near-term rebound, yet be watchful for their long-term damage,” she says.
Andrew Mies, chief investment officer at 6 Meridian, an investment adviser in Wichita, Kan., says a lot of the firm’s clients are confused lately by what they see in the day-to-day real-economy, and what is happening in financial markets. The two don’t have to always march in step, he says, but they “need to converge eventually, or the valuations of some of these companies isn’t going to be logical at all.” Some of the tech-stock valuations were brought down in the market’s declines late last week, but the market remains near record levels.
With rising speculation among individual investors, and the uncertainty of the November election, it’s a difficult market to gauge. Will the optimism reflected in the current market prove well-placed or folly? “The stock market lives a year in the future,” as far as predicting where the economy and corporate earnings are headed, notes Mr. Mies, “but those economic conditions and earnings need to be realized for the market to continue to perform.”
Mr. Power is a Wall Street Journal news editor in South Brunswick, N.J. Email him at [email protected].
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