|Jul-08||Y-T-D||1 Year||3 Year||5 Year|
|MSCI Emerging Markets||-3.77%||-15.09%||-4.36%||22.72%||27.21%|
|Lehman Muni Bond||0.38%||0.40%||2.84%||3.22%||4.35%|
|ML High Yield||-1.60%||-2.86%||-0.55%||3.53%||6.85%|
|CSFB Bank Loan Index||-0.97%||-2.71%||-1.06%||2.88%||4.21%|
|Citi World Gov't Bond||0.21%||5.25%||13.87%||6.66%||7.08%|
Like the unrelenting summer heat, market volatility would not dissipate in July. U.S. stocks made new lows in mid-July (10,732 on the Dow Industrials) on increasing concerns about economy weakness and the credit crisis. The second half of the month, however, brought the welcome news of a long-overdue decline in oil prices. Crude oil peaked during July at $147 on a speculative frenzy and closed the month at $124 – a descent of more than 15%.
Despite the rally in U.S. stocks during the last two weeks of the month, the S&P 500 Index fell by 0.8% in July. For the first seven months of the year, the S&P 500 declined by 12.7%.
The relief of declining oil prices directly contributed to a reversal in leadership within the U.S. stock market. For the month, financials stocks gained 7.1% and energy firms lost 13.9%. A leadership change was also evident in the cap structure, with small caps outperforming large caps and mid caps.
International equities slumped by over three percent for the month on growing apprehension that economic weakness was spreading throughout the developed world. The MSCI EAFE Index declined by 3.2% in July, underperforming the S&P 500 by over 2.3%. While long-term trends are spotted only in hindsight, the dramatic, multi-year outperformance of international stocks versus large cap U.S. stocks may have ended for a time.
The yield on the 10-year Treasury held steady near 4.0%, and the broad-based Lehman Aggregate Index declined by 0.08% for the month. High-quality bonds provided little comfort in the first seven months of 2008, rising a mere 1%, as measured by the Lehman Aggregate. High yield bonds priced in the increasing threat of defaults and declined in July by 1.6%.
The abrupt pull-back in the prices of oil and other raw materials knocked the Dow Jones AIG Commodity Index down by nearly 12% for the month – the sharpest one-month decline for commodities in 28 years. However, the aforementioned commodity index is nonetheless up over 22% for the trailing 12-month period through July. REITs were a bright spot, gaining 3% in July on the heels of their brutal pounding of -11% in June.
The unemployment rate climbed to a four-year high of 5.7% in July (up from 5.5% in June), as employers cut jobs for the seventh straight month. Initial jobless claims rose to their highest level in five years. U.S. manufacturing stagnated as July orders dropped to the lowest level in almost seven years.
The dire news continued for housing: a national average of home prices fell 15.8% for the 12 months ending May 2008.
However, not all of the economic news was bleak. U.S. gross domestic product (GDP) rebounded modestly in the second quarter to an annualized, after-inflation rate of 1.9%. By historical measures, the U.S. economy so far appears to have dodged the recession bullet. In addition, President Bush signed into law the most aggressive governmental effort so far to stem the country’s housing crisis. The law intends to help 400,000 homeowners facing foreclosure and to extend financial lifelines to mortgage lenders Fannie Mae and Freddie Mac.
The Federal Reserve indicated that it is likely to keep short-term interest rates stable in the near-term. The ongoing housing woes, paltry auto sales and the weak labor market have restrained the Fed’s hand to fight inflation.
In every market environment we strongly believe that investors should stay diversified across a variety of asset classes. We encourage our clients to steadfastly reject the false allure of market timing. In the words of the famous (and wildly successful) investor Warren Buffett: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
Scott Middleton, CFA, CIMA