U.S. Stocks Continued To Outperform The Rest Of The World In The Second Quarter. What’s Next?

Monday, July 08, 2013 10:47
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U.S. Stocks Continued To Outperform The Rest Of The World In The Second Quarter. What’s Next?

Tags: active management | Economic Outlook | momentum investing | stocks | style classification

The second quarter brought more good news for investors in U.S. stocks, which continued to dominate the global investment scene. No other asset class even comes close to the lofty 14% return on U.S. stocks so far this year. Will this dominance continue? Read on for my views on that question and for a review of second-quarter results.

 

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U.S. stocks earned 2.5% in the second quarter, bringing the year-to-date return up to 14%. By contrast, the EAFE index lost 1% in the quarter, bringing the year-to-date return down to 4%. Since U.S. stocks earned 16% last year, the 18-month return through June was 32%.
 
Small cap growth stocks led the way in the first half, earning more than 19%. By contrast, large cap core companies earned only 7.5%. Other than these extremes, style returns clustered around 14%. (See Surz Style Pure® classifications.) On the sector front, consumer discretionary and health care fared best, earning 20%. By contrast, materials lost 7.5%.
 
 
 
When you cross styles with sectors you can exploit momentum effects. In Searching for Alpha in Heat Maps I showed how heat maps can be used to forecast winners and losers, based on momentum.
 
The following table shows the forecast I made in April (check me out) and the actual results. As you can see, momentum “worked” in the second quarter, with my picks to outperform doubling the market with a 4.8% return while my forecast underperformers lost big time, decreasing by 8.4% on average.
 

U.S. Market  in 2nd Quarter of 2013 Earned 2.4%

High Momentum Earned 4.8%

Low Momentum Lost 8.4%

Mid-cap Core Consumer Staples

2.8%

Small-cap Core Telephones & Utilities

-4.4%

Small-cap Growth Financials

3.8%

Small-cap Growth Materials

-17%

Small-cap Core Consumer Staples

7.8%

Small-cap Growth Energy

-3.7%

 
Using the same method, I have forecast winning and losing sectors for the third quarter. For my picks, go to the full version of my Quarter 2 Commentary.
 
Foreign markets earned 2%, lagging both the U.S. stock market’s 14% return and EAFE’s 4.5% return. All countries outside Europe and Japan suffered losses.
 
 
 
I also forecast winning and losing segments in foreign markets for this quarter, and my foreign forecasts did not turn out as well as my U.S. forecasts. The “Low” momentum underperformed as predicted, but so did the “High” momentum. My full Quarter 2 Commentary includes my sector forecasts for the third quarter in world markets.
 
Remember, momentum doesn’t always work. My full commentary includes an analysis of the June slide, along with my predictions on quantitative easing, gold and bonds.
 
My goal is to give you some places to look for opportunities. Good luck!
 
So What's Next?

Quantitative easing will end, along with its distorting effects. Markets will adjust to an un-manipulated reality: higher interest rates, inflation and the pain of controlling our crazy spending, especially government spending. It won't be easy, but it is inevitable. U.S. markets will not be the best place to be during the transition.

 

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