Stimulus measures boosted fund returns in 3Q

Associated Press Modified: October 11, 2012 at 5:45 pm •  Published: October 11, 2012
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BOSTON (AP) — There's not much good news for investors. The outlook for the global economy is worsening and U.S. corporate profits are starting to shrink.

Even so, the Standard & Poor's 500 index climbed 5.8 percent in the latest quarter, while U.S. stock mutual funds returned an average 5.3 percent, according to fund tracker Lipper Inc.

The stock market is a leading indicator, which means that its movements generally anticipate changes in the economy around six months before they occur. So how to explain the recent gains for stocks, given the worsening outlook?

The answer is simple: Policymakers in the U.S., China and Europe have come to the rescue with new stimulus programs and financial support.

Although the global economic outlook didn't improve, investor perceptions of what central banks were willing to do changed, says Tom Roseen, a mutual fund analyst with Lipper. "It looks like they're willing to do whatever it takes to keep the markets rolling, and get employment back on track," he says.

That realization is pretty much the story behind the stock market's recent strength, Roseen says.

Most notable was the Federal Reserve's approval last month of a third round of bond-buying to stimulate the economy and stock market.

Stocks rallied throughout the summer in anticipation of the Fed's move as investors tried not to be discouraged by the quarterly profit outlook. Earnings from July through September are expected to be about 1 percent lower, on average, than a year ago. It would the first such quarterly decline in three and a half years. Earlier this year, Wall Street analysts were forecasting third-quarter earnings would modestly grow rather than decline.

Meanwhile, the economy continues to grow slowly, although jobs gains last month are fueling modest optimism. Outlooks in China and Europe have worsened, and the International Monetary Fund has scaled back its global growth forecast.

Against such a backdrop, it was a strong third quarter for mutual fund investors:

NEARLY EVERYTHING RISES: All but four of the 90 stock and stock-bond fund categories that Lipper tracks posted gains. The exceptions were niche categories, including "short" funds that profit by correctly betting that a stock will fall. Most of those bets ended up poorly in a rising market, and the funds lost an average 10.6 percent.

GOLD'S APPEAL GROWS: The Fed's approach to fuel economic growth elevates the risk that inflation will eventually spike, eroding the earnings power of bonds and many lower-risk investments. Gold tends to increase in value when inflation fears rise. The top-performing sector funds were those investing in stocks of precious metals mining companies, an average 22.4 percent return; and funds that invest directly in precious metals by owning gold and silver, up 15.7 percent.

FOREIGN STOCKS COME BACK: Funds investing in U.S. stocks have done better than foreign stock funds most of the year, due to the relative strength of our economy. But stock funds investing primarily overseas returned an average 6.6 percent in the third quarter, compared with 5.3 percent for U.S. stock funds. A key reason for the overseas performance edge was investors' growing confidence that European leaders can control their continent's debt crisis.

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