The Market Rallies, but Will it Last?

In line with the rest of the stock market, most equity funds posted positive returns during the week of March 13 through March 20th. According to Lipper, the average US diversified stock fund gained 4.64 percent and the average stock fund ( a figure that include the performance of over 9,600 stock funds) was up 4.5 percent. Although year-to-date total returns for both groups is still negative, down 1.17 percent and 1.8 percent respectively, that week's rally pleased many.

"It feels good to see some positive news in the market, " says Lorraine Miller, a South Florida investor. " My mutual funds were doing so poorly, I thought about selling everything and wasn't even reading the mail I got about them. Now, I'll hold on to them."

With funds categories like S & P 500 funds, large-cap growth, large-cap value, science and technology, telecommunications, and financial services---all up over 5 percent for that week--- it's easy to see why investors like Miller were optimistic.

But the question everyone wants answered is whether that one-week rally marks the beginning of a sustained long-term one or was in response to the Iraq war beginning and a belief that it would be a short-lived war as the first conflict in 1991 was.

While that answer is hard to predict, here are snapshots of what the market looked like in 1991 prior to the Gulf War, and then today, prior to the current conflict. Data is from Ned Davis Research:

• The S & P 500 P/E in 1991 was 15.5x; now it is 27.7x.
• The S & P dividend yield in 1991 was 3.75 percent; today it is 1.91 percent.
• Mutual fund cash/assets in 1991 was 11.4 percent; today it's 4.4 percent.
• Stocks as a percentage of household financial assets in before the war in 1991 was 17.7 percent; before this conflict began it was 29.7 percent. Stocks as a percentage of institutional financial assets in 1991 was 24.4 percent; now it's 34.6 percent.
• Credit market debt in 1991 was $13.8 trillion; currently it's 31.7 trillion.

Read through those numbers and you'll see that the one consistency is, today's market environment is far different than it was before the 1991 Gulf War began. This means investors cannot assume that all war rallies are created equally. As for the big change in the mutual fund cash/assets figures, the pros at Ned Davis Research say that a high cash/asset percentage indicates that there is more buying power for funds---meaning that they have more money to put to work in the market. Lower cash/asset percentages mean that funds have less liquidity.

So what's this all mean to fund investors? Don Cassidy, a senior analyst at Lipper Inc., says that fund investors need to recognize that mutual fund's are long-term investments.

Whether in war or peace, "mutual funds should not be thought of as short-term trading vehicles," he says.

#

Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.