U.S.-Stock Funds Rose 4.9% in February in an Inflation-Wary | Sidnaz Blog

Investors have been feeling pretty good so far this year, and it appears that only the inflation ghost can spook them.

Major indexes hit more records during February, which meant continued gains for many fund categories. The total return of the average diversified U.S.-stock fund for February was 4.9%, to push the year-to-date gain to 5.3%, according to Refinitiv Lipper data.

However, the market’s supportive pillars—government spending and the Federal Reserve’s aggressive monetary policy—are also making investors worry about whether inflation can be kept in control as the economy recovers from the pandemic lockdowns. As a result, markets have been volatile.

“Good earnings with low interest rates have been positive for the market,” says

Sal Bruno,

chief investment officer of IndexIQ, a subsidiary of New York Life Investments. Still, he says the real story has been rotation between sectors of the market—what he calls a Covid rotation, “which is taking a little steam out of growth stocks, and into a little more-cyclical plays, like industrials which do a bit better in a cyclical recovery.”

Meanwhile, “a lot of flows are going into small-caps since they are more geared to growth and recovery,” says Mr. Bruno. Small-cap value funds were one of the best February categories, with a 10.9% gain to push the year-to-date gain to 15.3%. (See more on small-caps in today’s cover story, at WSJ.com/fundsreport.)

Interestingly, gold prices aren’t rising even though there are inflation worries—despite the traditional relation between the two. Some analysts speculate that bitcoin is replacing gold in some people’s minds as an inflation hedge. Gold-oriented funds fell 7.8% in February and are down 12.5% for the year to date.

International-stock funds rose 2.4% in February, and are up 1.5% for the year to date.

Scoreboard

February 2021 fund performance, total return by fund type.

These international funds are enjoying a snapback. Last year, the U.S. market did so well while Europe and developed Asian markets weren’t as strong, says

Tom Davis,

managing director and global equity portfolio manager at Jennison Associates in Boston. “So there is some thought, rightly or wrongly, that somehow those overseas markets have more room to run than the U.S. So there’s some push to move into those products and reduce the U.S. exposure,” he says.

“I think part of it is looking backward at what happened in 2020 and what might be better opportunities for 2021,” Mr. Davis adds. “What plays out is a huge question mark.” (International-stock ETFs are drawing cash.)

Bonds fell. Funds tied to intermediate-maturity, investment-grade debt (the most common type of fixed-income fund) were down 1.4% in February and are down 1.9% for the year to date.

One thing is clear as the U.S. and the world try to reopen from the pandemic lockdowns: “I think we’re in for a pretty choppy market both up and down over the course of the year, and how we end the year is anyone’s guess,” says Mr. Davis. Given this, companies’ underlying fundamentals will continue to make the difference, he says.

Mr. Power is a Wall Street Journal news editor in South Brunswick, N.J. Email him at [email protected].

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