The Summer Rally Continues

09/09/2009 11:20 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says stocks continue to look good after another strong month, and she highlights the best performing areas.

Stocks extended the rally that began to resuscitate investors after last year’s fast and painful losses. The Dow Jones Industrial Average gained 3.8% in August and the Standard & Poor’s 500 index, 3.5%. The Dow Jones Global index, excluding the US, gained 4.3%.

Last year the US stock market lost nearly 40% of its value in just nine weeks from September through mid-November. Now, after reaching a low last March, the broad market S&P 500 is up 15% year to date, a decent annual return. Yet stocks fell so far from their pre-recession October 2007 highs that despite a 50% rally since March, the S&P 500 index is still missing $4.8 trillion in market value. After six months of gains, the index remains down more than 18% for the trailing 12 months.

The economic news has improved. World trade has increased and leading indicators are positive—granted, these are heavily influenced by the direction of the stock market. Home prices have edged up although foreclosure rates are climbing, as is real estate held on bank balance sheets that will eventually have to be sold. Productivity has surged partly because of the “benefit” of lower employment costs due to mass layoffs. Inflation is clearly not a problem.

Value funds in all capitalizations outperformed growth funds last month. Large caps outperformed small caps and mid caps did best of all. The weakest style box was small-cap growth.

Among sectors, real estate and financials were the clear leaders last month. Natural resources and energy have been weak, partly because crude oil fetched $115 a barrel a year ago, compared with around $68 at month end.

Many foreign funds lagged last month. Europe remained strong, but Latin America and emerging markets sank along with Pacific region funds. Top-ranked funds are predominantly value funds, but some growth funds appear and an interesting mix of both large-cap and small, international, and domestic remain.

After what some see as a six-month buying spree, how much cash is left sitting on the sidelines? Quite a lot and according to Barron’s, “one big reason why the consensus expects any pullback to be shallow.”  Barron’s [recently] reported that even after the record outflows since mid-March, money market funds still hold $3.58 trillion, equal to 34% of the stock market’s capitalization.

And holding cash is not likely to get any more rewarding any time soon. Yields on taxable money market funds have dropped below 0.5%, and some municipal-bond and Treasury funds are essentially at zero. But remember that balanced accounts are prudent for most investors and all investors still need to manage asset allocation.

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