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U.S. stocks notch double-digit gains in first half of year

The Dow was up 13.8% in the first half. The Standard & Poor's 500 rose 12.6% and the Russell 2000 rallied 15.1%.

June 28, 2013|By Tom Petruno
  • Gregory Rowe, left, and Mark Muller, center, work on the floor of the NYSE. U.S. stocks saw double-digit gains for the first half of the year.
Gregory Rowe, left, and Mark Muller, center, work on the floor of the NYSE.… (Richard Drew, Associated…)

For U.S. investors, it was a good six months to just stay home — and to start imagining the world weaned off cheap Federal Reserve money.

Major Wall Street stock indexes posted double-digit returns in the first half, buttressed by a continuing, though slow, economic expansion.

The U.S. market held on to most of its gains despite a surge in long-term interest rates, as the Fed began to signal a readiness to pull back from its 4-year-old financial stimulus program.

The Dow Jones industrial average ended Friday down 114.89 points, or 0.8%, to 14,909.60, but was up 1,805 points, or 13.8%, in the first half.

Broader indexes also advanced in the half as the bull market entered its fifth year. The Standard & Poor's 500, a benchmark for many retirement savings plans, rose 12.6%, its best first-half performance since 1998. The Russell 2000 index of small-company shares rallied 15.1%.

American investors who own foreign stocks mostly scored lower gains in the half — or suffered losses — as growth fears rocked emerging markets, much of Europe remained mired in recession and the strong dollar clipped returns.

The average emerging-market stock mutual fund, hit by deep losses in China, Brazil and Russia, slid 8.8% through Thursday, according to Morningstar Inc.

But the investors who may end up most disappointed by the first half may be the millions of Americans who have shifted large sums into bonds since 2008, seeking a haven. Most bond owners are in the red this year as the jump in market interest rates has depressed the value of older fixed-rate bonds.

"I think a lot of people did not believe they could lose money in bond funds," said Brian Belski, chief investment strategist at BMO Capital Markets in New York.

The yield on the 10-year U.S. Treasury note, a benchmark for mortgages and other long-term interest rates, ended Friday at 2.49% after reaching a two-year high of 2.61% on Tuesday.

The T-note yield has soared nearly a full percentage point from 1.63% in early May.

The reversal in yields fueled losses in most bond mutual fund categories. The Pimco Total Return Bond fund, the world's largest, lost about 3% in the last six months as measured by total return, the change in principal value plus interest income. The fund was up 10.4% last year, continuing a decade-long streak of positive returns.

Stocks and bonds worldwide had largely been sailing along until mid-May, when top Fed officials began hinting that an improving U.S. economy could eventually mean a cutback in the central bank's stimulus program.

To help keep interest rates down and prop up the economy, the Fed has been buying $85 billion a month in Treasury and mortgage bonds.

After their June 19 meeting, Fed officials confirmed that they would seek to reduce bond purchases at some point if the economy continued to expand and unemployment continued to decline.

Although the decision wasn't a total surprise, stocks, bonds and commodities slumped as some investors sold. The Dow tumbled 4.3% over four sessions, and bond yields rocketed.

Gold plummeted deeper into a bear market, as the possibility of a pullback in Fed stimulus dimmed gold bugs' fears of rampant inflation ahead. Gold futures ended the half at $1,223.70 an ounce, near a three-year low and down 27% in six months.

But U.S. stocks quickly revived this week as bargain hunters stepped back in. At Friday's close the Dow was off a modest 3.2% from its record closing high of 15,409.39 on May 28.

Market bulls believe investors will increasingly see the idea of reduced Fed stimulus as a positive because it would indicate the economy was on sound footing.

The transition to that mind-set, however, is likely to be rocky, many analysts warn.

"We see a summer of uncertainty," said Barry Knapp, head of equity strategy at Barclays Capital in New York. He expects U.S. stocks overall to lose as much as 10% in the next few months from their recent peaks, then stabilize.

Many bulls are betting that U.S. stocks eventually will draw money from other assets, particularly bonds, if long-term interest rates continue to creep up. Bond mutual funds have been hit by heavy net cash outflows over the last three weeks.

Some money managers, however, believe that long-term interest rates aren't likely to go much higher in the near term, with inflation low, the economy growing moderately and the Fed still holding its benchmark short-term rate near zero.

Jeffrey Gundlach, who heads bond fund giant DoubleLine Capital in Los Angeles, told investors in a conference call Thursday to expect "increasing stability" in markets in July. He said bond yields had quickly reached attractive levels as some investors panicked and sold, and he expected Treasury yields to fall back later this year.

A summary of some of global markets' big winners and big losers in the first half:

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