|
| ||
 Investment Professionals Access Account Open Account Fund PerformanceRetirement |
||
| Webcasts Press Center Forms and Prospectus About the AdvisorFrank Talk |
||
|
The second quarter 2000 was tough on all sectors of the world
economy except healthcare, consumer staples, energy and utilities.
Most exceptions were directly correlated to investors’ concern over
higher inflation and interest rates, and a slowing economy.
These concerns forced investors to benchmark to earnings, meaning that fundamental corporate earnings rather than indexes are currently driving the stock market. Moreover, the question arose as to who was in control: the Federal Reserve with its sole focus on inflationary trends and its control over short-term rates or the business cycle and continued economic well-being, as seen in the “juggernaut” economy? One of the major questions of the period was: “Will the Fed tighten or not?” They did on May 16, but not in June, as anticipated. Currently, Fed Funds rates rest at 6.5 percent, up 50 basis points for the quarter. The 30-year long bond rests at 5.89 percent, up only five basis points over the same period. In addition, there is considerable discussion about the sustainability of our strong economy, which grew by 5.5 percent in the first quarter, but moderated in the second quarter to 3.5 to 4.0 percent. And, just as happened at the end of the first quarter, earnings dominate the market. Energy continues to show the highest forecasted earnings among the 11 S&P 500 industry sectors. Basic materials and technology follow it closely. Lagging sectors include communication services, consumer cyclicals and financials. Market Valuation First quarter earnings for 2000 were strong, as companies in the S&P 500 posted a rise of 23 percent. We expect this earnings momentum to continue. Consensus estimates for U.S. corporate earnings growth is expected to be over 19 percent for the second quarter. The commodity cyclical sector is expected to post higher earnings growth; however, the energy and technology sectors also drive stronger earnings. Sector Analysis The market began to diversify in mid-first quarter, embracing industry sectors and groups other than technology. In effect, the market recognized the over-valuation of Internet stocks, punishing most of them while rewarding a few other sectors although selective leading technology stocks did well. Still, few sectors were rewarded in the quarter. In the healthcare sector, drug, biotechnology and health maintenance organization stocks did well. In late June, we heard the dramatic announcement that the human genome survey was complete, helping to boost attention toward healthcare. Among consumer stocks, soft drinks and drug stores did well, as did publishing. A few underdogs rallied, including waste management and tobacco. On the downside, basic materials had a tough quarter, with metals, paper and forest products and steel falling more than 20 percent. Apparel and specialty retail stores faltered. In communication services, long distance telecommunications turned negative. Mutual Fund Activity Less money flowed into index funds, especially as markets turned negative. More importantly, more money flowed into mutual funds in the second quarter of 2000 than in the second quarter of 1999, although money flows have been down on a sequential quarterly basis. Still, it looks as if there may be less new cash flowing into funds, especially if markets stay neutral. |
