Sat | Jun 19, 2021

Strong returns for investors in second quarter, but at a price

Published:Wednesday | July 3, 2019 | 12:16 AM

Most types of investments did well from April through to June, with US stocks setting record highs, bond funds packing a year’s worth of returns into three months, and gold hitting its highest price in six years. But chronic checker-uppers, those who looked at their funds every few days or weeks, know how bumpy the ride was getting there.

Investors had to stomach losses of more than six per cent for their S&P 500 index funds in May, in between the records set in April and again in June. Anyone holding funds with stocks from developing economies absorbed even bigger losses, as worries rose about worsening trade relations between the United States and countries around the world.

It was the US Federal Reserve that ended up making the second quarter a success story for most investors. The central bank hinted that it may cut interest rates this year to help the economy, an about-face from its direction just a few months ago. After raising rates in December for the seventh time in two years, the Fed intimated early this year that it would hold steady on rates. Now, some investors expect it to cut rates up to three times this year.

Here’s a look at some of the trends that made the quarter:

Bonds delivered strong, steady returns while other markets shook.

Bonds are supposed to be the ballast for any portfolio, and they more than lived up to that reputation during the second quarter. While stock markets around the world careened up and down, bond funds not only pumped out regular interest payments, but also rose in price. The largest bond fund by assets returned 2.8 per cent for the quarter, as of Tuesday, more than it returned in four of the last six full years.

Prices for bonds rise when yields fall, and the 10-year Treasury yield dropped below two per cent during the quarter for the first time since 2016. Just don’t expect returns to stay this big for bond funds in the future.

“There’s less cushion,” said Gene Tannuzzo, deputy global head of fixed income at Columbia Threadneedle Investments. With the 10-year yield moving in a range of 2.00 per cent to 2.04 per cent earlier this week, down from 2.50 per cent early in the quarter, there’s simply less room for yields to fall to push up prices for bonds. Lower yields also mean investors buying bonds today pocket less in income.

Unless there’s a recession, which would likely cause a steep drop in rates, bond funds will likely return no more than they’re yielding.

Many voices along Wall Street expect rates to stay close to where they are. Deutsche Bank’s DWS recently cut its forecast for where US Treasury yields will be a year from now by 0.30 percentage points, down to 2.00 per cent for the 10-year Treasury, for example. At Wells Fargo Asset Management, the forecast is for 2.00 per cent to 2.50 per cent on the 10-year Treasury at the end of the year.

“Bonds are unlikely to repeat the performance we’ve seen in the last six months,” said Tannuzzo. “But given the Fed, they can still be that consistent ballast.”

‘Buy and hold’ was a winning strategy again for stock investors.

For years, those with strong stomachs have consistently been rewarded for seeing any dip in the stock market as a buying opportunity.

In May, investors began to doubt that. As stocks sank after President Donald Trump threatened to raise tariffs first on China and then on Mexico, investors pulled a net US$12.9 billion out of US stock funds, according to Morningstar. Even index funds, which have been hoovering up cash in recent years, saw outflows as investors scrambled to get out of the way of tumbling markets.

But those who stuck with stocks were quickly rewarded in early June when Fed Chairman Jerome Powell gave the first hints that the central bank could cut rates. The Fed held rates steady at its meeting in the middle of June, but investors are nearly certain that it will cut rates at its meeting at the end of July.

The S&P 500 returned to a record on June 20, and the largest US stock fund returned 2.9 per cent for the quarter, as of Tuesday.

The European Central Bank has also indicated its willingness to help the economy, and foreign stock funds recouped much of their losses from earlier in the quarter. The average emerging-market stock fund returned 0.3 per cent in the quarter, as of Tuesday, after being down as much as 5.5 per cent earlier in the quarter.

Gold glittered again. After years of oscillating between roughly US$1,000 and US$1,400 per ounce, gold broke above the range during the quarter for the first time since 2013.

Again, look towards the Fed. Rate cuts tend to help the price of gold by holding down the value of the dollar against other currencies and opening the possibility of higher inflation.