How the Largest Stock Funds Did in the Third Quarter

By the time the books closed on the third quarter, investors in the largest U.S. stock funds saw their 2022 losses deepen.

Up until the final days of the quarter, it looked as if a handful of the most widely held stocks might end the third quarter with minimal losses, but a punishing last week sent most into negative territory. And when investors zoom out to the full year, returns still look grim.

For example, the largest U.S. stock fund, the $326.8 billion Fidelity 500 Index FXAIX, ended the third quarter down 4.89%, bringing its year-to-date loss to 23.88%. This puts the fund on track to its worst year since 2008, when the index fund lost 37.03%.

The broader Vanguard Total Stock Market Index VTSMX held up slightly better, losing 4.48%.

Funds focused on growth stocks, which tend to be more sensitive to higher interest rates, saw their returns jump early in the quarter when it looked like the Federal Reserve would let up on interest-rate hikes. At the same time, value funds, which had held up better than growth funds during the first-half slide, lagged the rebound.

Even with the market’s retreat in the second half of the quarter, most growth funds still held up better than those focused on value stocks. Invesco QQQ Trust QQQ lost 4.46%, and Vanguard Growth Index Investor VIGRX declined 3.83%.

Value-oriented funds suffered larger losses in the quarter but finished the third quarter with better returns than growth-oriented funds for the year. Dodge & Cox Stock DODGX lost 7.19% in the quarter, putting it in the 83rd percentile in the large-value Morningstar Category. Hurting the fund was FedEx FDX (down 34%), GSK PLC ADR GSK (down 26%), and Sanofi AS ADR SNY (down 24%), according to Morningstar Direct.

At the same time, dividend-heavy strategies didn’t provide the kind of shelter from market declines as they had in previous quarters. American Funds Washington Mutual Investors Fund AWSHX and American Funds Fundamental Investors ANCFX fell further than the average large-blend fund.

The largest actively managed U.S. equity fund, the $193.1 billion American Funds Growth Funds of America AGTHX, turned out a 2.70% loss, buoyed in part by a large cash stake and cyclical holdings including Tesla TSLA, which gained 28%. Netflix NFLX, which plagued a number of growth funds last quarter, also rallied 35%, helping the fund.

Vanguard Primecap VPMCX had a tough quarter because of its technology and healthcare holdings, attribution from Morningstar Direct shows. FedEx and Adobe ADBE hurt the firm along with a disappointing quarter from AstraZeneca AZNCF and Intel INTC.

Over time periods greater than a year, U.S. equity funds are still showing positive returns. The Fidelity 500 Index is up 8.15% on an annualized basis over the past three years, while the Invesco QQQ Trust is up 12.99% over the same period.

Markets Brief: What to Watch for in the CPI Report After the Strong Jobs New

With the latest jobs report showing that the economy continued to chug along despite the Federal Reserve’s aggressive interest rate increases, attention now turns to the next reading on inflation to set the market’s tone.

The September employment report came in largely as economists had forecast. But it also cemented expectations that the Fed is on track for yet another rate hike in November, skewering chances that the market would extend its relief rally from earlier in the week.

Despite losing ground Friday, the Morningstar US Market Index ended the week up 1.67%, having bounced back from its new bear-market low set on Sept. 30.

Now, eyes will be on the September Consumer Price Index report due out Thursday, for more signs of what might be expected from the Fed in the coming months.

Throughout much of 2022, inflation readings have played a big role in setting the market’s direction and driven the Fed’s unprecedented interest rate increases. The last CPI report, which showed inflation holding at higher levels than had been expected, was a major surprise. The result was a slide in stocks of 4% on the day it was released, and bond yields surged. Ultimately, the last CPI report played a major role in stocks falling back to new bear-market lows.

The focus for this week’s report will be on core inflation, which excludes food and energy prices, says Preston Caldwell, head of U.S. economics for Morningstar.

“We already know that energy prices fell in September,” Caldwell says, hence the real question is if prices fell in other areas.

“Maybe we’ll start to see some relief on car prices, given some data showing used car prices already headed down.” Used vehicles, which were one of the largest contributors to high inflation figures in the last year, appears to be trending down. As of September, the Manheim Used Vehicle Value Index has fallen about 13.5% from its high in January.

Economists broadly believe core inflation decelerated in September, with average estimates seeing a monthly increase of 0.4% from 0.6% in August, according to FactSet. However, year-over-year inflation is expected to edge up to 6.5% from 6.3% in August.

Despite the market’s tendency to have big reactions to the CPI data, Caldwell warns against placing too much emphasis Thursday’s report.

“One CPI report is only going to tell you so much given the month-to-month volatility of the data,” he says. “I’m tracking three-month growth for the inflation data to smooth out the volatility, so one good report won’t be a cause for celebration for me.”

Third-quarter earnings season is also set to begin. Results from major banks such as JPMorgan (JPM) and Morgan Stanley (MS) are due Friday, Oct. 14, and may influence expectations for the next few weeks.

Events scheduled for the coming week include:

• Wednesday: Producer Price Index report for September to be released, Pepsi (PEP) reports earnings.
• Thursday: Consumer Price Index September report to be released. BlackRock (BLK), Taiwan Semiconductor Manufacturing (TSM), Walgreens (WBA), and Delta Air Lines (DAL) report earnings.
• Friday: Retail Sales report for September to be released. JPMorgan, Morgan Stanley, Citigroup (C), Wells Fargo (WFC), U.S. Bancorp (USB), First Republic Bank (FRC), and PNC Financial Services (PNC) report earnings.

For the trading week ended Oct. 7:

• The Morningstar US Market Index rose 1.67%.
• The best-performing sector was energy, up 13.32%.
• The worst-performing sectors were real estate, down 3.36%, and utilities, which fell 2.47%.
• Yields on the U.S. 10-year Treasury rose to 3.88% from 3.80%.
• West Texas Intermediate crude oil prices rose 16.54% to $92.64 per barrel.
• Of the 843 U.S.-listed companies covered by Morningstar, 587, or 70%, were up, and 256, or 30%, declined.

What Stocks Are Up?

Energy stocks soared as oil and gas prices jumped after the Organization of the Petroleum Exporting Countries said it would cut production by up to 2 million barrels per day, CNBC reported. WTI crude rallied during the week to close at $92.64 per barrel, its highest price since late August. APA (APA), Marathon Oil (MRO), and Murphy Oil (MUR) were among the top gainers in the industry.

Twitter (TWTR) shares rose on reports that Tesla (TSLA) chief executive Elon Musk would uphold his earlier deal to buy the company at $54.20 per share.

Cannabis stocks rallied after President Joe Biden pardoned prior federal offenses of ``simple possession of marijuana,” which raised sentiments for legalization efforts. Tilray (TLRY) and Curaleaf (CURLF) led the group in gains.

What Stocks Are Down?

Tesla’s stock declined after the electric vehicle maker reported preliminary third-quarter deliveries of 343,830. While that is an all-time high, it was still fewer than the market expected, says Morningstar strategist Seth Goldstein.

“While management cited logistics issues that slowed end of quarter deliveries, we think this reflects the challenges ramping up production at its two new factories as well as restarting the Shanghai plant after the COVID-19 lockdowns during the second quarter,” Goldstein says.

Chinese EV makers XPeng (XPEV), Li Auto (LI), and Nio (NIO) also fell for the week.

Concerns about rising interest rates put pressure on real estate stocks which caused investors to rotate out of the sector. Welltower (WELL) and Essex Property Trust (ESS) were among the sector’s worst performers in the past week.