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Equities Face Turbulence

Posted by Eric Anderson on December 03, 2010

eric_f.jpegOver the past month most indices rose slightly; however, equities began to run into some turbulence, and they lost about half of the gain that existed in early November.  The best results for the month came from the NASDAQ which rose 3.3%, and 11.7% so far this year.  Both the Russell 2000 (small caps) and the S&P 500 rose 2.2% for the month and 16.3% and 9.3% respectively year-to-date.  The Dow Jones Industrial Average rose 1.2%, while the MSCI EAFE index slipped 0.4% during the last four weeks, and they are up 9.9% and 6.4% respectively year-to-date.

While three of the ten S&P 500 sectors lost a little ground during the prior month with negative returns, the pullbacks were not enough to put any of the sectors into the red on a year-to-date basis, though Healthcare has been the weakest at just 50 basis points of return on concerns over the recently passed healthcare legislation.  During 2010 there has been a huge divergence in sector returns as seen in the almost 22% gain experienced by the Consumer Discretionary versus the nearly flat performance delivered by the Healthcare sector.  The Consumer Staples, Materials and Energy sectors all have quite similar results at just under 11%, with the Telecommunications and Industrial sectors doing better with 12.7% and 17.4% respectively.  The Financials, Technology, and Utility sectors are also quite close with returns around the 5% level so far in 2010. 

U.S. equity funds have experienced $30 billion of outflows during this year given increased competition from exchange traded funds, combined with the lingering concerns over the economic recession and poor individual investor confidence, all of which has inhibited the purchase of traditional U.S. equity fund products.  In comparison, during 2009 a total of $75 billion was redeemed from U.S. equity funds, and purchases of international equities so far this year have significantly lagged 2009 levels with $16 billion this year versus $85 billion purchased during last year.

With the present record low short term interest rates, money market funds have seen the bulk of the redemptions in 2010 at $508 billion (versus $513 billion for all of 2009) with the great majority of the money market fund sales going into various fixed income funds.  Specifically, $195 billion has gone into U.S. Bonds, $147 billion into International Bonds, $105 billion into U.S. Investment Grade Bonds, $27 billion into U.S. Municipal Bonds, and $10 billion into U.S. High Yield Bonds.

(Data Source: EPFR Global, Inc.)