Capital Markets Overview - Second Quarter 2008

By Chris Bardos, MS, CFS

The second quarter began with higher hopes that perhaps earnings growth would improve, and the credit crunch may have seen its worst levels.  Those hopes evaporated as the credit crisis lingered and consumers began to slow their spending under the weight of higher food and energy prices.

The Dow Industrials were up almost 9% for the quarter on May 2, before beginning a steady decline as worries returned.  As the quarter came to a close, the major market indices flirted with declines approaching bear market territory (a 20% decline from the recent market high reached on October 9, 2007).  The markets experienced the worst performance for the month of June dating back to June 1930.

The Dow finished the quarter down 7.4%, suffering its third straight quarterly decline and its worst second quarter since 2002.  Of the 30 Dow components, 24 ended the second quarter with declines.  The Standard & Poor’s 500 declined 3.2% while the Nasdaq Composite Index actually rose slightly, up 0.6% for the quarter.  Year to date the damage is as follows: Dow down 14.4%, S & P 500 down 12.8% and Nasdaq Composite down 13.5%. (Source: Reuters, Wall Street Journal Market Data Group).

Overseas markets also experienced declines as the Morgan Stanley Capital International EAFE index, the proxy for overseas equities markets, declined 3.5%.  This brought its year to date drop to -12.7%.  (Source: Reuters, Wall Street Journal Market Data Group).

Bond markets were faced with many of the same challenges they had experienced earlier in the year, and another concern, inflation, took center stage.  The Federal Reserve did cut its benchmark short term rate to 2% at the end of April, its seventh interest-rate cut since last September.  However, the Fed held rates steady at its June 25^th meeting amid heightened inflation worries.

The proxy for the broad bond market, the Lehman Brothers U.S. Aggregate Bond Index, dropped 1.1% during the second quarter.  The yield on the 10-year U.S. Treasury note rose to 3.97%.

The financial markets and the economy are in a tough spot as slowing growth both domestically and overseas has consumers and investors on edge.  Growing inflation concerns, resulting from higher food, materials and energy prices add another layer of uncertainty.

During times like these it is important to keep a few things in mind.  First of all, understand that investing during uncertain times is not the exception, but the rule.  Also be patient and recognize that short-term underperformance is an inevitable part of investing.  Yes, the markets have disappointed investors this year.  However, that does not mean they will always perform poorly and never recover.  Going forward, we will continue to seek investment opportunities while maintaining a defensive posture, as we expect volatility to continue.

We believe that fundamental research, combined with a focus on risk management, is the key to identifying investments with the best long-term prospects and reduced downside risk. We will continue to concentrate our efforts on helping to deliver above average returns while taking below average risks in preserving and growing your assets.

This information should be used in the context of each investor’s risk tolerance and time horizon and it should be noted that past performance is neither a projection nor a guarantee of future results.

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