When the spin cycle is the status quo: 3Q fund review

NEW YORK — Investors should be used to all this dizziness _ they’re certainly getting enough practice.

Investments around the world veered sharply up, down and back again last quarter amid worries President Donald Trump’s trade war and the slowing global economy could sink the United States into recession. The fury didn’t amount to much in the end, though, at least for investors who resisted the temptation to sell during the tumult. The largest funds mostly ended the July-September quarter with modest gains or losses.

It’s the latest test of patience for fund investors, who’ve been thrown into the spin cycle after years of relatively placid and strong returns.

Consider the largest mutual fund by assets, Vanguard’s Total Stock Market Index fund, which returned more than 12% in seven of the last 10 years.

It returned just 1.1% last quarter, and a modest 2.8% for the past 12 months. That’s actually an improvement from a few weeks ago, when the fund was down 3.5% for the quarter.

The smoothest ride for investors last quarter came from funds that invest in bonds, gold and other investments considered safe. Prices for Treasurys and other high-quality bonds rallied after Trump announced the extension of tariffs to virtually all Chinese goods, shocking markets and prompting investors to seek shelter.

American Funds Bond Fund of America, for example, is one of the largest mutual funds that invests in high-quality bonds, and it returned 1.4% last quarter. It also didn’t have a day where it lost 0.6% or more. The largest stock fund, meanwhile, had losses that big or worse in nearly a quarter of its trading days.

The jump in bond prices means bonds yield less, which limits the future returns they can provide. A 10-year Treasury was yielding 1.64% Tuesday, down from 2% at the start of the quarter and 2.68% at the start of the year. But even with that smaller cushion, bonds can still provide protection for investors when stocks are volatile, said Pramod Atluri, one of Bond Fund of America’s managers.

Atluri points to the Federal Reserve and other central banks around the world, which have aggressively cut interest rates to help support the economy. The Fed lowered rates twice during the third quarter, its first cuts since the financial crisis in 2008.

“Normally, stocks are up 5% to 10% and bonds are up a couple per cent” for a year, he said. “But the time you really need bonds is when stocks are down 20%, 30%, and the ability to generate 5% to 10% on bonds is valuable.”

Atluri doesn’t forecast such a sharp drop for stocks, or an imminent recession. But he said the outlook is very uncertain given how much depends on the U.S.-China trade war and the 2020 election’s impact on taxes and other policies.

Philip Orlando, chief equity market strategist at Federated Investors, is optimistic that the United States and China can reach a trade deal sooner than many investors expect. That’s why he predicts stocks will end the year with a strong rally. But he expects plenty of bumps in the market until then.

Besides the trade talks, Orlando said the next couple months are full of market-moving events including the United Kingdom’s pending exit from the European Union, a new head taking over at the European Central Bank and a Federal Reserve meeting on interest rates.

“I think we’ll be in much better shape by the end of the year,” he said. “But we’ve got a couple of humps to get over.”

In other words: Be prepared for even more dizziness.

Stan Choe, The Associated Press