Despite sluggish global growth and debt crisis hurdles, stock markets around the globe surged in June. Both U.S. and foreign stock markets finished the month up sharply, although most were down for the quarter. Second quarter losses had nearly erased first quarter gains until the last day of the quarter when a relief rally—fueled in part by a European plan to rescue banks and governments—pushed stocks to their best point gains of 2012. But this came just a week after some of the biggest losses of the year.
In spite of all the negative news, the broad U.S. stock market is about 5% above where it was one year ago. Corporate earnings growth continues to outpace stock gains, making stocks cheaper. Treasury yields are about half of their July 2011 levels, and lower oil and commodities prices are stimulative. We are further along the long road of working through the financial crisis, but investors remain very cautious.
U.S. growth funds continue to rank ahead of value funds in all size categories. Among diversified funds, a combination of growth funds and high-dividend-paying funds lead. (We currently own more growth than dividend funds, mainly because they have been more consistent this year.) The top sectors are still homebuilders, biotech, REITs, utilities and consumer staples. Tech is also back among the buys in our July issue and NASDAQ 100 index funds, like QQQ, continue to lead.
Although many of the best performing funds in June were foreign, particularly European, these funds were among the weakest performers for the quarter and their steep losses over the past year held them far down the ranks.
The greatest strength in the bond markets came from the corporate sector in June. High yield funds delivered solid returns (almost 2% on average) and higher quality corporate bonds also pushed forward. Yields ended the month slightly higher, with the 10-year Treasury starting the month at 1.57% and ended at 1.67%, causing government bonds to lag. Foreign bonds gained almost 1% and emerging market bonds popped dramatically in June, after suffering a dismal month in May.