Four funds may be granted stay of execution

After a poor month of May, stocks are recovering in June, but is it enough for the Saltydog analyst?

The Fed comes to the rescue

Last month was, by many measures, the worst May that we've seen for many years. Four trillion dollars was wiped off stock markets around the world and, in the US, the S&P 500 fell 6.6% - its worst May return in seven years and second-worst since the 1960s.

The more tech-focused Nasdaq dropped by 7.9%, reminiscent of the October and December crashes of last year. The trade war between the US and China was ramped up as both sides increased tariffs, and this affected stock markets around the world.

In the UK, we had additional concerns over the Brexit stalemate, which has ended up forcing a leadership contest and made us take part in the EU elections (won by the Brexit Party). The FTSE 100 index lost 3.5% in May and the FTSE 250 went down by 4.3%.

Investors obviously keep a keen eye on world affairs, and they do influence stock markets. However, in recent years political turmoil has not always had the catastrophic effect on share prices that people might have expected. This has been due to the intervention of the central banks.

To stimulate stock markets after the last financial crisis, central banks around the world lowered interest rates and injected cash into the economy through quantitative easing (QE). In the US, the Chair of the Federal Reserve, Ben Bernanke, and then his successor, Janet Yellen, could be relied upon to take action to support stock markets if it looked as though they were going to fall too far.

Jerome Powell took over as Chair of the Federal Reserve in February 2018. With generally improving economic conditions, he has been more in favour of tightening monetary policy and increasing interest rates. Investors have been less confident that he will come to their rescue.

Last week, he spoke at the Federal Reserve Bank of Chicago research conference on monetary policy strategy and started by talking about "recent developments concerning trade negotiations and other matters". He went on to say that "as always, we will act as appropriate to sustain the expansion". 

Investors took this as a clear sign that he was open to cutting interest rates if necessary, and stock market indices started to rise.  The S&P 500 is currently up 4.4% in June, and the NASDAQ is up 3.9%. We've also seen a rebound in the UK with the FTSE 100 gaining 2.4% and the FTSE 250 up 1.4%.

Our portfolios have remained relatively unchanged over this period, although we have sold a couple of small emerging market holdings. When we are buying funds, we are looking for the best-performing funds in the best-performing sectors, taking into account their historic volatility. We do this by grouping the funds into their Investment Association sectors and then combining the sectors into our own proprietary Saltydog groups.

We have 'Slow Ahead', for low volatility, 'Steady as She Goes' for medium volatility, and 'Full Steam Ahead' for high volatility. Once we have bought a fund, we tend to hold on to it until it fails to beat the average return for its Group for three weeks in a row.

When we reviewed the portfolios last week there were four funds that had struggled for two consecutive weeks and, if the general market downturn had continued, would probably have been given their marching orders this week.

We haven't finished preparing our analysis for last week yet, but I suspect that the recent rebound will shoot them back up the tables and give them a stay of execution.

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