By Janet Brown, NoLoad FundX
SAN FRANCISCO (MarketWatch) — Are we crazy? Buying growth funds when the market is tanking? Surprisingly, even amidst the fierce sell-off, the funds that are rising in our performance ranks are primarily large-cap growth funds.
The debt crisis hurdles and the already sluggish economy sent stock markets around the globe into a tailspin. In just two weeks, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +3.15% and the Standard & Poor’s 500 Index /zigman2/quotes/210599714/realtime SPX +2.62% each dropped 11%, and the Russell 2000 /zigman2/quotes/210598147/delayed RUT +3.79% and MSCI Europe Australia Far East Index each lost 16%.
Back to 1987
Our Trading Deck has been home to a spirited debate over whether we're in for a crash.
• L.A. Little: Don't worry | Michael Gayed: Worry
• The warning signs of a 1987-style crash
• Hulbert: Stocks as overvalued as at 2007 high
Given the relatively light volume associated with the summer doldrums, it didn’t take much to tip the scales, and there are plenty of reasons to be concerned. Technicians report a head and shoulders topping pattern, investors are deluged with negative news, and global and economic uncertainty abounds.
Many people remain scarred by their experience in 2008, and some have vowed never to follow the market down again. Back in 1999, the market action had trained people to buy on the dips, but more recent market declines seem to have conditioned investors to do the opposite. Objectively, the level of panic in Thursday’s market action is often associated with significant buying opportunities. If you’ve gone into this downturn fully invested and feel compelled to sell, we caution you to take measured steps.
So why are we buying growth? First, growth is outperforming other areas of the market and we believe in aligning with current market leadership. This doesn’t mean we know what the future holds, but we know that if we keep aligning with current leaders, eventually this will lead us to capitalize on prevailing market trends. The fundamental case for growth is also compelling.
Why is growth doing better in this climate? In spite of slowing economic growth, corporate earnings continue to exceed both expectations and the growth of the stock market. Faster growing companies are more appealing in a slow growth environment. Even if we enter another recession, it’s important to recognize that slower economic growth may already be priced into the market and not all companies are destined to suffer the same fate. By concentrating our portfolios in leading funds we can position ourselves for a variety of possible outcomes. Right now, leading funds are predominantly U.S. growth funds.
Both companies and consumers have been positioning for slower growth for some time.. They have become more conservative. That’s one of the reasons that valuations are more attractive now than the last time earnings were at a similar level.
Tech companies, which tend to dominate growth portfolios, and other large global growth companies, tend to hold a lot of cash and have strong balance sheets. There’s a modicum of safety in the fact that these companies have cash and are generating more every day. Inventories are relatively lean and while the financial crisis has hurt both jobs and the economy, it hasn’t stifled innovation.
Funds we like now:
Marsico Growth — /zigman2/quotes/201432786/realtime MGRIX -1.51%
T Rowe Price Blue Chip Growth — /zigman2/quotes/208533233/realtime TRBCX -1.27%
Fidelity Blue Chip Growth — /zigman2/quotes/205289944/realtime FBGRX -0.95%
iShares S&P 500 Growth — /zigman2/quotes/208542267/composite IVW +2.30%
After these new purchases our equity portfolios will be mostly domestic. In our managed accounts, most of our clients have balanced portfolios. Bonds funds have buffered the recent volatility and we’re not recommending changes to those allocations at this time.
Whatever you do, don’t panic. Long term success requires discipline. This month our Upgrading strategy leads us to buy growth funds. Our next steps will be to monitor performance and change our portfolios to align with changing market leadership. Over time, this strategy has served us through a wide array of market conditions.
Janet M. Brown is president of DAL Investment Company and editor of the NoLoad FundX newsletter . She also founded the FundX Upgrader Funds series of eight no-load mutual funds managed by DAL . (fundx.com)
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