Falling Oil Prices Fuel Funds Rise
Falling oil prices and interest rates propelled mutual funds higher in the third quarter, putting funds back on track to post their fourth straight positive year since the bear market ended in 2002.
The average domestic stock fund returned 2.5 percent in the three months ending September 30, as the Standard & Poor's 500 index of blue-chip stocks enjoyed its best third quarter in nine years. This marked a distinct turnaround from the second quarter, when stock funds lost more than 2.8 percent, according to the fund tracker Morningstar.
Rates. The big difference: While the Federal Reserve Board voted to raise short-term interest rates four times in the first half of this year, the central bank left rates alone during the third quarter. "This was a quarter that the Fed saved," says Joseph Quinlan, chief market strategist at Bank of America's Investment Strategies Group.
The Fed was able to hold rates steady because crude oil prices fell from nearly $80 a barrel in August to around $60 at the end of last month. While this hurt natural resources sector funds, which tumbled 9 percent on average in the quarter, most other categories of stock funds rose. Technology, utilities, healthcare, financial services, telecommunications, and even real-estate funds posted average quarterly returns of at least 4 percent. Large-company funds also shone, after trailing small-company stock funds since the start of this decade.
One surprise: Bond funds outperformed equity portfolios for the second straight quarter, the average taxable bond fund rising 3.1 percent. That's because bond traders, fearing an economic slowdown, snapped up long-term treasuries. Yields on 10-year treasury notes sank from 5.23 percent in July to 4.63 percent at the end of the quarter. Bond prices rose, helping long-term treasury bond funds net returns of 6.7 percent.
This story appears in the October 23, 2006 print edition of U.S. News & World Report.