Market in Review: Summer 2000
The increasing volatility culminated in a sharp correction in stock prices in the second quarter. Stock price declines were most severe in those areas where speculation had been most prevalent and valuations most extended. For example, Internet stocks declined 50% from their highs in the quarter and, although prices bounced in late May and early June, these stocks were still down 40% at the end of June. Other technology stocks suffered declines of 30% and since many of these stocks are concentrated in the NASDAQ, this index declined 35% from its high and was still down 20% at the end of the quarter.
| Markets at a Glance | | Summer 2000 | 2nd Quarter | 12 Months
ending 6/30 | | S&P 500 | -2.66 | +7.24 | | DJIA | -4.00 | -3.29 | | Russell 2000 | -4.05 | +13.01 | | International (EAFE) | -4.06 | +14.08 | | Lehman Govt./Corp. | +1.69 | +4.23 | | Lehman 10 Yr. Municipal | +1.60 | +4.47 | | Inflation (CPI) | +0.7 | +3.7 |
The broader stock market indices also went through a correction with the S&P declining about 10% before ending the quarter down 4% from its peak. The Dow, which represents more "old" economy stocks, was down less but did not rebound much when other stocks rallied.
The Federal Reserve continued its efforts to slow the economy as it raised short-term interest rates one half of a percent in May. However, as there was some evidence that growth was starting to slow, the Fed declined to act in late June and short-term rates were left unchanged. Among these signs of slowing were the increasing number of companies that announced earnings and revenue disappointments which resulted in sharp declines in the stock prices of the companies or sectors involved.
The bond market, in sharp contrast to the stock market, was stable. Despite the rise in short term rates and some signs of inflation especially in energy prices, intermediate rates, as measured by the yield on the ten year Treasury bond, were unchanged over the last three months.
Looking forward, it will become increasingly difficult for the stock market to continue to produce very high returns and we could enter a period of trendless volatility. The Federal Reserve is determined to slow economic growth, which will lead to more earnings disappointments such as we have seen in the last few weeks. This potential slowing of earnings growth is important because the expansion of price earnings ratios which has occurred over the last several years has probably ended. Therefore, with many stocks still at high valuations, further price gains will be dependent upon earnings growth alone without the benefit of price earnings multiple expansion.
While we view the current market environment with caution, we will try to use any market volatility to increase investment returns. Furthermore, as we have emphasized in the past, balanced portfolios with a mix of investment strategies will generate long term investment success.
If you would like to discuss your retirement goals with us, please give us a call. We look forward to assisting you in retirement planning from your point of view. Have a happy summer.
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