If January represents an accurate barometer for the rest of the year, 2006 should smile upon domestic stocks. Despite continued high energy prices, weak gross domestic product (GDP) growth in the fourth quarter of 2005, worries about when the Federal Reserve will end its tightening campaign, and a potential crisis brewing over Iran's nascent nuclear ambitions, the average U.S. domestic stock fund gained 4.76% during the month.
Small-cap funds led the pack in January, with the average small-cap growth portfolio leaping 8.35%. Large-cap value funds posted the lowest average return of all domestic fund categories, rising just 3.05%. Mid-cap funds came in the middle. The S&P 500 gained 2.65% for the month. (For complete results of more than 5,000 funds, see BW Online's Interactive Mutual Fund Scoreboard.)
While many observers have been waiting for large-cap stocks to dominate after six years of underperformance, they may have to sit tight a bit longer (see BW Online, 2/2/06, "A Small-Cap True Believer").
"Investors have been attracted to growth opportunities," says Rosanne Pane, mutual-fund strategist at Standard & Poor's. "The most attractive growth rates are in the small and mid-cap space, with the growth styles leading returns for the month. We believe mid- and small-caps will continue to lead returns over the short term, as recent earnings disappointments have been focused in the large-cap arena."
Standard & Poor's equity analysts estimate operating earnings for the S&P MidCap 400 and S&P SmallCap 600 indexes will advance 19% and 21%, respectively, in 2006. In contrast, the large-cap S&P 500 index is projected to deliver only 11% operating earnings growth this year.