Market in Review: Fall 2000
In the third quarter, stock prices were flat to down as the strong price rebound in August was offset by a sell off in September. Earnings disappointments continue to be met by sharp declines of 30-50% in the shares of offending companies. Furthermore, the number of companies reporting or signaling earnings shortfalls increased as rising energy prices, the falling euro, and slowing demand put pressure on profits. Stock price declines accelerated in early October especially in technology as earnings shortfalls and Mideast turmoil troubled investors.
| Markets at a Glance | | Summer 2000 | 3nd Quarter | 12 Months
ending 9/30 | | S&P 500 | -.097 | +13.28 | | DJIA | +2.36 | +4.60 | | Russell 2000 | +0.80 | +22.01 | | International (EAFE) | -7.97 | +2.63 | | Lehman Govt./Corp. | +2.88 | +6.25 | | Lehman 10 Yr. Municipal | +2.48 | +6.38 | | Inflation (CPI) | +0.7 | +3.5 |
The stock market of 1998 and 1999 was dominated by large growth and technology stocks. In April of 2000 there was a distinct shift in the market triggered by the sharp sell off in the NASDAQ. Money started to move from large growth, technology stocks and mutual funds to small companies and value stocks. This rotation continued through the third quarter so that companies with high price earnings ratios were hurt relative to those with low price earnings ratios.
After increasing short-term rates six times over the last twelve months, the Federal Reserve in all likelihood has stopped raising rates and will wait to see if the developing economic softness will continue. In this environment, interest rates, as measured by ten year Treasury notes and ninety-day Treasury Bills, were flat.
Looking forward, economic growth is slowing. This will create pressure on profit margins, which are at a 49-year high. Therefore, it is likely that we will continue to see earnings shortfalls, which in turn could produce lower share prices. In addition, while there has been some narrowing in valuation differentials, there is still a valuation disparity between large company growth stocks and the rest of the market. Over time, we would expect this disparity to narrow which could put pressure on the major market averages. However, after five years of 20% plus annual returns we should expect to have a period of consolidation in stock prices.
In this uncertain environment, we will continue to stress the advantages of our Model portfolios to help add stability to your retirement account. It is only natural to feel uneasy when the markets react the way they have. We want to help you evaluate whether your investments make sense and to help you avoid reacting to short-term market events. Please feel free to contact us with any questions or concerns.
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