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3rd quarter brings a stock rally to remember

But the powerful rebound can't quell investors' worries about the economy. Many are pouring money into bond funds, opting for the relative safety that fixed-income investments can provide.

October 11, 2009|Tom Petruno

The stock market's second-quarter performance was such a hit, Wall Street decided to virtually replicate it in the third quarter.

Lifted by a rising tide of hope for a sustained economic recovery, share prices worldwide continued to rebound powerfully in the three months ended Sept. 30.

The benchmark Standard & Poor's 500 index posted a total return of 15.6% in the quarter, just slightly less than the 15.9% gain in the second period, as more investors grew confident that stocks' 12-year lows in early March wouldn't be revisited any time soon.

And as in the second quarter, the third-quarter rally was broad-based, pulling up nearly every U.S. stock industry sector as well as the vast majority of foreign equity markets.

For The Record
Los Angeles Times Tuesday, October 13, 2009 Home Edition Main News Part A Page 4 National Desk 1 inches; 31 words Type of Material: Correction
Mutual fund report: An article in Business on Sunday about how stock mutual funds performed in the third quarter incorrectly reported the name of Convergent Wealth Advisors as Convergent Wealth Management.
For The Record
Los Angeles Times Sunday, October 18, 2009 Home Edition Main News Part A Page 4 National Desk 1 inches; 33 words Type of Material: Correction
Mutual fund report: An article in the Oct. 11 Business section about how stock mutual funds performed in the third quarter incorrectly reported the name of Convergent Wealth Advisors as Convergent Wealth Management.

For stock mutual fund investors, that meant it was nearly impossible to lose money -- other than in bear-market funds that were betting on another plunge in shares.

The average U.S. stock fund gained 15.5% in the third quarter after a 16.8% rise in the previous quarter, according to Morningstar Inc. Year to date through Sept. 30 the average fund was up 23.8%.

Although that's a big help in rebuilding Americans' devastated nest eggs, it will take much more of the same just to get back to even after last year's market meltdown, when the average domestic stock fund plummeted 36%.

In recent months, a growing number of investors seem to have decided that the risk of another stock plunge outweighs the potential for recouping more of what they've lost.

Even as the market continues to bet on better times ahead for the economy -- the Dow Jones industrial average reached a new 2009 high Friday, closing at 9,864.94 -- domestic stock mutual funds overall have been suffering net cash outflows every week since mid-August.

Many investors with cash to put to work have been pouring it into bond funds rather than stock funds, opting for the relative safety that fixed-income investments can provide.

Some financial advisors say investors' caution about the 7-month-old rebound in stocks is well-founded.

Steve Lockshin, a Los Angeles-based advisor at Convergent Wealth Management -- a firm that serves high-net-worth investors -- believes that U.S. equities are overvalued after the 58% surge in the S&P 500 index since early March.

In the face of still-worrisome economic fundamentals, Lockshin said, "I feel that people are willing the market to go up." He's keeping the stock-fund portion of clients' portfolios lighter than usual, he said, and is holding more assets in cash than he did before the markets' calamity last year.

It's understandable that there's a strong temptation to pare back on stocks at this point. Although the economy has been improving on many fronts the employment situation remains dismal, and many companies and individuals can't get credit from banks.

What's more, a crucial question is whether the economy could quickly slide into a black hole if the government tried to pull back from the unprecedented financial life support it has provided.

All of this has made for massive uncertainty about 2010. Will it bring another recession and deflation? Or will inflation begin to surge because of the huge sums of money the Federal Reserve has pumped into the financial system?

What if the dollar crumbles? Then again, what if it soars because the surprise is that the U.S. economy mends faster than expected?

The continuing rebound in stocks has given investors a chance to catch their breath and try to prepare for whatever may be next. The challenge is to maintain a portfolio that reflects your basic expectations for the economy but that also is hedged for the unexpected.

Here are three basic strategy ideas to consider:

* Don't fight the cycle. Nick Thakore, manager of the Putnam Voyager fund in Boston, worries that too many investors don't appreciate the economy's natural ability to rebound from recession.

Although he doesn't minimize the long-term, or "secular," challenges the U.S. economy faces, including the need for consumers to reduce debt and boost savings, "Secular concerns have kept people from embracing a cyclical recovery," Thakore said.

Even after Wall Street's gains of the last six months, he said, he still considers this to be "one of the greatest stock-picking environments we've ever had," given how depressed many shares still are compared with their 2007 or 2008 highs.

Putnam Voyager, up more than 55% year to date, has benefited from sharp rebounds in stocks such as Apple Inc., Time Warner Cable Inc. and CVS Caremark Corp.

As corporate earnings recover, Thakore believes that there's much more room to run in shares that are still well below their previous peaks. He cites insurer Aflac Inc., which crashed from nearly $70 in 2008 to as low as $11.50 in March and is back to $45. The company, Thakore said, was unfairly lumped in with other financial firms, even though Aflac didn't share their troubles.

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