Despite Volatility, U.S. Growth Leadership Persists

August 4, 2015

Sailboat_GoldenGateMarkets were volatile in July. During the first two weeks, major stock indexes touched both their lows and highs for this year, but most markets ended the month up handsomely and gained enough to make up for June’s losses.

The S&P 500 index gained 2.3% last month, EAFE was up 2.0%, the DJIA gained 0.6%. Small caps lagged (the Russell 2000 lost 1.1%), and emerging markets were negative.

These major indexes have essentially traded sideways all year, up or down no more than 3%. But as always, some areas have done far better than others. About 20% of the stocks in the S&P 500 are down more than 20% this year to date, and nearly half are flat or down. Some pundits cite this as a sign of weakness, but we see leadership as opportunity. While half the S&P 500 is flat or down, the other half is up, and that’s where Upgrading is focused.

What’s Working

Despite market zig zags, leadership has been remarkably consistent. U.S. markets rebounded strongly in July. Within the U.S., growth led value, and large- and mid-cap stocks outpaced small caps.

Among diversified funds, large-cap U.S. growth funds such as Brown Advisory Sustainable Growth (BAWAX) and Vanguard US Growth (VWUSX) are top ranked. (BAWAX was one of the four sustainble responsible investing funds we profiled here.) More aggressive mid-cap growth funds like AMG Brandywine (BRWIX) and tech-heavy funds like PowerShares QQQ (QQQ) have also been bringing in good relative returns. Health care and biotech continue to be the top sector funds along with retail and homebuilder funds.

Fixed Income

Bonds improved in July, but not all bond funds benefited. The Fed decided at its recent meeting not to raise rates, but left open the likelihood of a rate hike in either September or December. Rates were down slightly on the month and this favored government and agency bonds, though corporate bonds rose as well.

High yields lost about 0.5%, but some funds (particularly those avoiding the energy sector) held on to gains. World bond funds were also mixed: some lost almost 1%, but those that are currency hedged bounced nicely off weakness.

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