Market in Review: Spring 2000
The U.S. economy continues to produce the unprecedented combination of very strong economic growth with no inflationary pressures. In the last quarter of 1999, the economy expanded at a 7.3% annual rate – the strongest quarterly growth rate in over 16 years. At the same time, profit margins continued to expand because of further gains in productivity. This too is unprecedented.
The Federal Reserve tightened two more times in the quarter bringing to five the number of rate increases in the last twelve months. The Fed has clearly stated that it wants to slow economic growth in order to preempt any rise in inflation. Short rates have already been increased from 4.75% to 6.0% and with further increases likely it is reasonable to expect that the U.S. economy will slow late this year and into next.
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Markets at a Glance
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Spring 2000
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1st Quarter
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12 Months
ending 3/31
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S&P 500
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+2.25
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+17.92
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DJIA
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-4.68
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+13.37
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Russell 2000
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+6.80
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+35.58
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International (EAFE)
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-1.48
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+23.62
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Lehman Govt./Corp.
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+2.09
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+1.50
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Lehman 10 Yr. Municipal
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+0.48
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+2.32
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Inflation (CPI)
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+1.4
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+3.7
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In this environment, stock price volatility had increased to record levels in all markets but especially the NASDAQ. In the first quarter, the NASDAQ had three declines of over 10% and then in the first week in April declined over 18% in a selling panic before reversing in one of the largest single day reversals on record. After stabilizing for a few days, the NASDAQ sold off again and approached a bear market.
In addition to the incredible volatility, the stock markets were very narrow for most of the quarter with gains concentrated in the "new" economy stocks. However, late in the quarter and into April there were some early signs of a change in leadership. Value stocks started to outperform growth and momentum stocks as excess liquidity from large mutual fund cash inflows rotated quickly between stock market sectors and into the "old" economy.
Bonds acted better in the quarter as longer term interest rates declined despite the Fed’s actions to raise short-term rates. However, even with the declining longer rates, bonds are quite attractive especially on an inflation-adjusted basis.
Looking ahead, we are cautious and alert you that the excesses in the markets will likely cause more dramatic swings similar to those we have already experienced in April. Stay the course. Despite these swings, we remain confident in the long-term success of your investments.
The equity results were helped by the fact that your portfolio is constructed with a mix of investment strategies. These are value stocks, growth stocks, small company stocks, large company stocks, and stocks of foreign companies.
As we have said in the past, we recommend that you develop a good asset allocation strategy. If you would like to discuss your retirement goals, or would like to consider one of our managed models, please give us a call. We look forward to helping you reach your retirement goals.
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