Stocks Ignite Once More — Will the Rally Persevere?

February’s performance in the realm of top ETFs and mutual funds paints a picture of a bullish market, echoing sentiments of risk-taking reminiscent of historic surges in tech stocks.

Lipper Refinitiv data reveals an average gain of 4.97% for U.S. stock funds in the 29-day leap year February. These robust gains, marked by growth outpacing value, suggest a broadening of the rally beyond the realm of the dominant tech giants.

Small-cap growth funds surged by 7.41%, midcap growth by 7.31%, and large-cap growth by 6.84%. Notably, sector funds in global science and technology, along with domestic science and technology, spearheaded the charge with gains of 8.18% and 7.91% respectively.

Best February Since 2015 for Top ETFs

Both the S&P 500 and Nasdaq notched their most impressive February gains since 2015, with increases of 5.34% and 6.22% respectively, reaching new historic highs. These indexes have surged by over 7% in the initial two months of 2024.

However, investors who favored cash for its risk-free 5% annual yields saw returns taper to a modest average money market return of 0.40% in February. Less volatile bond investments also disappointed, with general bond funds declining by 0.95% and U.S. Treasury funds slipping by 1.70%.

AI Elevates Market Sentiment

The month saw stocks soar, buoyed by the revolutionary impact of artificial intelligence, the latest tech marvel to captivate Wall Street. Despite starting with the Fed’s cautionary stance on prolonged interest rates, February concluded with substantial gains, fueled by Nvidia’s (NVDA) stellar earnings report on Feb. 21.

The investor infatuation with AI has spurred a significant uptick in markets. However, the meteoric rise of AI stocks has also raised concerns of irrational exuberance reminiscent of the dot-com bubble of 1999-2000.

“This AI rally increasingly resembles the tech-dominated market of 1999-2000, where value investing took a back seat,” cautioned Eli Salzmann, manager of Neuberger Berman Large Cap Value fund (NPRTX). “It’s not a broad-based rally; you could call it the Nvidia market. The narrowness of the market makes me very, very cautious.”

Return to Rally for Top ETFs

The stock market’s resurgence is unmistakable. February witnessed a stellar performance in ETFs, particularly those focusing on growth, quality, momentum, innovation, and sectors like semiconductors and AI.

Leading the charge among U.S. diversified stocks were ETFs such as Invesco S&P MidCap Momentum (XMMO) with a gain of 14.49%, Invesco S&P 500 Momentum (SPMO) with 11.49%, and Innovator IBD 50 (FFTY) with 10.41%.

Sector-wise, risk-on sectors dominated the charts, with VanEck Semiconductor (SMH) rallying by 14.03%, SPDR S&P Biotech (XBI) by 12.57%, and Roundhill Magnificent Seven (MAGS) by 12.05%.

In terms of styles, growth ETFs outperformed, exemplified by Vanguard Growth ETF (VUG) surging by 7.07%, outstripping Vanguard Value ETF (VTV) with a 3.34% increase.

Cathie Wood Under Pressure

Despite the overarching bullish sentiment, aggressive ETFs like ARK Innovation (ARKK) managed by Cathie Wood, which saw substantial gains in 2020, faced pressure but rebounded in February. ARK Innovation gained 12.86%, narrowing its year-to-date loss to 2.14%. Similarly, ARK Next Generation Internet (ARKW) surged by 14.98% to return to profitability.

With such remarkable gains, investors are left pondering their next moves. Is it time to dive headfirst into high-growth sectors, or are there alternative avenues for profit?

Seasoned portfolio managers, recipients of the IBD 2023 Best Mutual Funds award, offer insights.

A Top Value Fund Manager Sees Potential in Value Stocks

Salzmann remains skeptical of the tech sector’s dizzying ascent, drawing parallels to the dot-com era’s eventual bust. He advocates for a contrarian approach, foreseeing opportunities in undervalued value stocks as the economy potentially slows post-Fed rate hikes.

“Value stocks are incredibly cheap relative to where many of these highflying stocks trade,” says Salzmann. He identifies financial stocks, especially megabanks like JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C), as attractive due to their enhanced resilience post-2008 financial crisis.

Salzmann also sees promise in defensive sectors like healthcare and consumer staples, where he identifies opportunities for growth.

Why a Top Mutual Fund Manager Favors Mid-Caps

Mahr shares Salzmann’s concerns regarding the market’s concentration in tech and large caps. He believes mid-cap stocks offer better opportunities and emphasizes the importance of earnings in driving stock prices.

Investors are advised to remain cautious and maintain diversified portfolios, especially when saving for long-term goals like retirement.

Control Your Risk with Top ETFs

Mahr underscores the importance of risk management, recommending investments in companies with strong earnings and cash flow. He suggests capitalizing on opportunities presented by market downturns to acquire quality stocks at discounted prices.

Chasing hot trends carries significant risks, warns Mahr.

Finding the Right Mix of Growth and Value Stocks

JPMorgan Equity Focus ETF (JPEF) adopts a balanced approach, combining growth and value stocks to achieve market-beating returns. Agranoff believes in the long-term potential of tech companies driven by AI spending and underscores the importance of quality in stock selection.

The fund has shifted its focus to undervalued stocks, identifying potential in sectors like transportation, real estate, and energy.

Opportunities Abound with Top ETFs

With an eye on value and quality, investors can navigate the market’s complexities and capitalize on emerging opportunities. Agranoff identifies companies like Morgan Stanley (MS) and JB Hunt Transport Services (JBHT) as attractive investment prospects, leveraging their resilience and growth potential.

Amidst the market frenzy, a prudent and diversified approach to investing remains paramount for long-term success.