U.S.-Stock Funds Rose 7.5% in a Choppy Quarter -- Journal Report

By William Power 

The third quarter for investors was the closest thing that passes for "normal" markets these days.

Yes, it was choppy. Nerves were short, as they have been in life overall. But there was nothing close to the historic movements -- down and up -- of the first and second quarters. In those dizzying two quarters that preceded the most-recent one, the average diversified U.S.-stock fund slid 25% and then snapped back 24%.

In the third quarter, in contrast, the average U.S.-stock fund rose a solid 7.5%, according to Refinitiv Lipper data, to push slightly into the black for the year, at 0.4%.

Big tech stocks including Appleand Microsoft are the most prominent group that has thrived during the pandemic lockdowns and the remote-working era that has ensued. The Nasdaq Composite Index, dominated by such stocks, is up 23% for the year to date, drubbing other major indexes. Tech investors are banking on the companies to continue growing even after the pandemic.

That is reflected in the positive results, on average, for growth-stock funds -- those powered by corporate-earnings potential. Lipper's measure of funds that invest in large-cap growth stocks was up 11.8% in the quarter and is up 23% for the year to date -- while most other stock-fund categories are in the red.

"Even though there is a lot of uncertainty in the short term about the economy and the upcoming election, we think the economy is making strides toward normalization," says Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management in Milwaukee. He notes that there has been a recovery in retail sales and housing. "There are reasons to say things are getting better rather than worse," he says.

That said, as the markets begin the fourth quarter, volatility is still high, and most strategists expect more in the lead-up to the election.

International-stock funds rose in line with U.S. funds overall in the quarter, though they continue to trail their American counterparts so far this year. The average international fund was up 6.8% in the quarter, to trim the year-to-date loss to 2.8%.

Bond funds rose. Funds tied to intermediate-maturity, investment-grade debt (the most common type of fixed-income fund) rose 0.9% in the quarter, to push the year-to-date gain to 6.3%.

Through it all, investors continue to be grateful for the stock-fund gains, but hedging their bets by pushing more money into bond funds. Investors withdrew a net $121.1 billion from U.S.-stock mutual funds and exchange-traded funds and $17.0 billion from international-stock funds in the quarter, based on Investment Company Institute estimates. They invested a net $218.0 billion in bond funds in the quarter.

"There's still reasons to understand uncertainty is going to be with us for a while," says Mr. Stucky. "The good thing is we don't expect broad-based shutdowns, which had a crippling effect on the economy in the second quarter, to be the recipe that policy makers turn to if there are more outbreaks."

Mr. Power is a Wall Street Journal news editor in South Brunswick, N.J. Email him at [e-mail].

(END) Dow Jones Newswires

October 04, 2020 20:53 ET (00:53 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.