Investors found few places to hide from 3Q losses

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BOSTON (AP) — Recovery was in sight. Just three months ago, many investors were close to being able to say they had made up their losses from the 2008 stock market meltdown.

Yet that now seems a distant goal. Debt problems in Europe and slow economic growth at home sent stocks sliding so far that pundits have begun discussing whether we’re in a bear market.

Stock mutual funds posted an average loss of 17 percent in the third quarter, according to fund tracker Lipper. That’s the biggest decline since a 23 percent drop in the fourth quarter of 2008, the height of the financial crisis.

Nearly all funds suffered losses in the latest quarter, including some that invest in bonds.

And the trend isn’t looking good. September was this year’s worst month for stocks, and market volatility has returned to levels not seen in more than two years.

The choppiness “has put even the most resolute bulls back on their haunches,” Lipper fund analyst Tom Roseen says.

Europe continues to muddle along as it tries to contain its debt crisis, and recent economic numbers indicate the U.S. could slip back into a recession. The pace of growth is even slowing in emerging markets like China.

The Standard & Poor’s 500 stock index is down 15 percent from its high for the year on April 29. A 20 percent drop would signify the start of a bear market.

Highlights from third-quarter fund performance numbers:

— Few can hide: Out of 86 stock and stock-and-bond fund categories, just two ended up with positive returns. Short-bias funds returned 30 percent. Those funds profit by correctly betting that a stock will fall. Another niche fund category, leveraged commodities funds that use borrowed cash to magnify an investment return, had an average 1 percent return.

— Economy drives returns: It was a lousy quarter for industrial and natural resources companies. Those stocks move closely in sync with the economy, because their profits are linked to demand for commodities. Three fund categories that specialize in such stocks, ranging from timber and mining companies to aluminum makers, posted average losses ranging from 23 to 27 percent. One of the worst-performing stocks was Alcoa, down 40 percent

— Banks falter: Funds that specialize in stocks of banks and other financial services companies lost an average 21 percent. Those stocks were hurt by the slowdown in the economic recovery; legal liability stemming from the flood of foreclosures; and fears that an inability of the Greek government to pay its debts could hurt European and U.S. banks alike. Shares of Bank of America tumbled 44 percent.

— Defense trims losses: Funds investing in stocks that tend to be stable performers in both rising and falling markets have lagged during much of the recovery. But those stocks fared relatively well in the third quarter. Utilities funds lost an average 6 percent, while consumer goods funds declined 11 percent. Strong performers in that sector included Coca-Cola, up 0.4 percent; and Procter & Gamble, down 0.6 percent.

— Foreign stocks flop: Overseas investments didn’t fare well. Global stock funds lost an average 20 percent. Key reasons included Europe’s debt crisis and the slowing Chinese economy. Funds specializing in Chinese stocks lost an average 26 percent and Latin American funds lost 25 percent. Japan funds fared relatively well, losing 5 percent.

— Large companies pay off: Funds that invest in stocks of large companies lost an average 15 percent. That’s better than the average 22 percent loss for funds focusing on small company stocks, known as small-caps. It was the second consecutive quarter that large has beaten small.

— Some bonds lost: Bond investors fared better than stock investors last quarter, but not all managed to escape losses. High-yield corporate bond funds lost an average 7 percent as investors worried the slowdown in the economy could trigger a rise in defaults. Those funds typically earn high rates of return, but carry a greater risk of volatility. Global bond funds lost an average 1 percent. In contrast, U.S. Treasury bond funds returned an average of nearly 15 percent. Investors see Treasurys as safe now relative to other investments such as stocks and riskier types of bonds.

The outlook for the fourth quarter is mixed. On the positive side, Lipper’s Roseen notes that corporate profits remain strong. Analysts expect third-quarter earnings gains will average 14 percent at companies in the S&P 500. Yet investors still worry that government leaders lack the ability to get a handle on the nation’s debt problems.

Congress and President Obama face a new test as a 12-member bipartisan supercommittee confronts a Nov. 23 deadline to come up with $1.5 trillion in deficit-reduction measures. At this stage, negotiators appear to be far apart.

For investors, that means one thing: Expect more market volatility.

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