Investor wrap-ups

The second-quarter wrap stories are trickling in, and the news for investors wasn’t pretty. After the Federal Reserve indicated it might pull back on low interest rates, the decline in some parts of the market caused steep losses for many investors.

Here’s the Wall Street Journal story about the declines:

As the second half of 2013 gets under way, investors have been tossed out of the frying pan and into the fire.

Front and center in the second quarter were the risks investors had taken by piling into strategies predicated on the Federal Reserve pumping an open-ended stream of money into the financial markets.

Then, as the Fed hinted at pulling back on its unprecedented low-rate policies, many investors were blindsided by the speed and scope of the resulting losses. Some of the biggest declines came in corners of the markets traditionally viewed as safe but offering higher yields, such as municipal bonds and dividend-paying stocks.

When it came to higher-yield investments, “everybody knew there was a bubble forming,” says Brian Singer, head of dynamic allocation strategies at William Blair & Co., which manages $56 billion. “They had just thought they would be the first ones out the door.”

As investors lick their wounds, they are seeing with new clarity how signals from the Fed and other major central banks can undermine the performance of higher-yielding investments—and markets in general.

However, the easy-money policies that drove investors into rate-sensitive strategies in the first place remain a dominant force in the markets.

The Bloomberg story talked about all the money investors pulled out of fixed income funds and piled into cash:

Investors who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world’s biggest fixed-income managers struggling to stem the flow.

The funds saw $61.7 billion of withdrawals as money market mutual fund assets rose $8.17 billion in the week ended June 25, according to TrimTabs Investment Research and the Money Fund Report. Bank of America Merrill Lynch’s Global Broad Market Index dropped 2.9 percent in the past two months, the most since the inception of the daily gauge in 1996, as Federal Reserve Chairman Ben S. Bernanke laid out possibilities for reducing the $85 billion in monthly bond purchases supporting the economy.

Market bears say losses are just getting started because yields barely exceed inflation, leaving little relative value in bonds as the global economy improves. Pacific Investment Management Co., BlackRock Inc. and DoubleLine Capital LP, which together oversee about $6 trillion in assets, said the worst is already over because the securities are fairly valued.

Bloomberg also pointed out that many investors took lower yields in order preserve capital:

Investors often retreat to money-market mutual funds during times of financial stress, accepting lower yields compared with bonds in exchange for higher liquidity. Assets surged during the credit crisis to a peak of $3.92 trillion in January 2009, according to data from the Investment Company Institute. Money funds held $2.59 trillion in the week ended June 26, data from the Washington-based trade group show.

Money-fund yields averaged 0.04 percent this year, based on the Crane 100 Money Fund Index, with the yield for the week ended June 26 at 0.03 percent. U.S. equity mutual funds had assets of $6.61 trillion as of April, according to the most recent ICI data. Bond fund assets were $3.56 trillion.

The USA Today article led with the stock market posting its best first-half gains since 1998:

It was a somewhat scary but ultimately satisfying second quarter for stock investors.

U.S. stocks shook off recent fears of a coming shift by the Federal Reserve to a less market-friendly monetary policy and a weak day Friday to finish the quarter in positive territory. The Standard & Poor’s 500 stock index, after a 2.4% second-quarter gain, finished the first half of 2013 up 12.6%, its best start to a year since 1998.

The Dow Jones industrial average gained 2.3% in the quarter, extending its first-half gain to 13.8%. The Nasdaq composite notched a quarterly gain of 4.2% and is up 12.7% for the year.

While the April-through -June quarter wasn’t nearly as profitable as the first quarter, when the major indexes posted double-digit percentage gains after the economy avoided going over the so-called “fiscal cliff,” the bull market in stocks remained intact.

The continued move higher came despite a bout of nerve-rattling volatility beginning in late May that was sparked by heightened uncertainty over the Fed’s timetable for pulling back on its massive bond-buying program. The Fed’s purchases of mortgage-backed bonds and long-term U.S. government bonds, which began in late 2008, have been instrumental in driving borrowing rates to record lows and goosing asset prices, including stocks. The prospect of less Fed support for markets and the economy led to initial negative reactions in both the stock and bond market.

All of this recent volatility and uncertainty will leave many investors searching for yield at a time when the safest investments aren’t so safe, the Wall Street Journal said:

That leaves investors having to thread the needle, still hunting for yield in a market where the safest investments—namely government debt—are offering meager returns by historical standards. At the same time, global economic growth continues to face challenges, which makes greater risk-taking harder to stomach.

Most of the coverage focused on the last part of the quarter and the Fed’s potential pull back from easy money policies. The stock market gains played a lower position in several of the stories but was the focus of the USA Today piece. One thing is certain, the recent volatility has cost a lot of people money in the past few weeks, and they’ll be looking for ways to make up lost ground in the second half of the year.