Stuck in neutral
Funds ran out of gas in the second quarter
While the bulls of Pamplona, Spain, were especially aggressive this year, the same cannot be said for the bulls of Wall Street.
After posting rip-snorting numbers last year--and continuing to roam in the first few months of 2004--the bulls finally seemed to tire out in the second quarter, as rising interest rates, oil prices, and geopolitical troubles gored the performance of many mutual funds.
Sour note. While the average domestic stock fund eked out a gain of 0.6 percent, many categories of funds--including technology, telecom, real estate, and financial services--finished the quarter underwater, setting a dour tone for the second half. "You've got interest rates and inflation both seemingly on their way up," says Russel Kinnel, director of mutual fund research for Morningstar. "That makes it a lot tougher to figure out this market."
Federal Reserve Board Chairman Alan Greenspan further confused matters by raising short-term interest rates by a fourth of a percentage point at the quarter's end. Nevertheless, bond traders pushed the yield on 10-year treasury notes up from 3.86 percent at the end of the first quarter to 4.62 percent at the end of the second. The higher market rates reduced bond prices, sending bond funds tumbling.
The average taxable bond fund lost around 1.8 percent of its value. Longer-term government bond funds, which are particularly sensitive to interest rates, lost more than 4 percent of their value in the quarter. The average emerging-markets stock fund, meanwhile, lost more than 8 percent of its value. Small-cap growth funds lost 0.3 percent, and while risky investments like technology and telecom funds lost money, conservative plays like healthcare funds and dividend-paying stocks made money.
This story appears in the August 2, 2004 print edition of U.S. News & World Report.
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