What’s Been Happening?
After a long run up, International and Emerging Markets took short, swift dives in May and June. The 25% decline from peak to trough in Emerging Markets qualifies as a true bear market by most definitions. Comparatively, US markets fell only modestly, not even qualifying for an official “correction” (10%). By the end of June, the asset classes that had fallen the most began to recover. All this occurred with heavy trading volume which we suspect means those who rushed in at the wrong time lost a fair amount of money. Bonds muddled along, mostly losing small amounts due to rising interest rates.
Trends to be Aware of
Inflation really is making a comeback, especially for services and using measurements that don’t exclude oil and food prices. In moderate amounts, inflation can be good for stocks as it allows companies to raise prices and increase profits.
Three months ago we wrote that the yield curve is flat, meaning there is little difference between long-term and short-term interest rates. Conventional wisdom says a recession is more likely in this environment, but we noted the Fed is motivated to raise rates not just to fight inflation but also to keep the dollar attractive. Global bond markets are not predictive of a recession – their yield curves never flattened out as much as ours.
Japan has the steepest yield curve in all of the developed markets, reflecting economic optimism in that part of the world.
Corporate earnings have continued to grow, resulting in a very attractive Price Earnings ratio for the S&P 500. The Federal Reserve reported using a valuation model for the stock market that compares the earnings of stocks to earnings of bonds. By that metric, the S&P 500 is 30% undervalued today.
What To Expect From Here
Although we all remember the New Millennium Bear Market like it was yesterday, stock market volatility has been low in the past year and a half by historical standards. That means we have become accustomed to a smoother ride than we really should expect.
Some Numbers for Comparison:
The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 6/30/06.
|
Index |
What it Measures |
Last 3 Mos. |
Last 12 Months |
3 Years, Annlzd |
5 Years, Annlzd |
|
Standard & Poors 500 |
U S Stocks w/div |
-1.44% |
8.62% |
11.21% |
2.49% |
|
Russell 2000 |
Small Stocks |
-5.03% |
14.55% |
18.69% |
8.49% |
|
Morgan Stanley EAFE |
Foreign Stocks |
0.94% |
27.07% |
24.43% |
10.44% |
|
MSCI Emerging Mkts |
Emerging Mkts |
-4.27% |
35.91% |
34.77% |
21.54% |
|
Thompson Tech/Comm |
Technology |
-8.93% |
9.43% |
10.15% |
-4.61% |
|
Real Estate Inv Trusts |
Real Estate |
-1.60% |
18.89% |
25.99% |
19.30% |
|
Lehman Bros. Ag Bond |
Bonds |
-0.08% |
-0.81% |
2.05% |
4.97% |
|
CPI |
Inflation |
0.85% |
3.23% |
2.99% |
2.43% |
Source: Thompson Financial
