Market Commentary
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July 2008— Monthly Market Recap |
Posted August 7, 2008 |
Two steps forward, two steps back
Stock markets darted around sharply in July in response to fluctuating oil prices, newly released economic data, and continued suspicions about the health of several key financial institutions. But, like a runner sprinting on a treadmill, the flurry of activity left the major indices basically right where they started. Governmental actions also played an important role toward month-end, as both legislators and regulators took steps aimed at shoring up the financial system, as well as the mood on both Wall Street and Main Street.
Domestic indices mostly flat
For investors who tuned out on the 1st and checked back on the 31st, July appeared to be a tranquil summer month. The Dow Jones Industrial Average (DJIA) eked out a gain of 0.43 percent for the month, while the S&P 500 Index (S&P) finished lower by a meager 0.84 percent. Those numbers, however, cloak a wilder ride along the way. Out of 22 trading days in the month, the DJIA and S&P each rose or fell by more than 1 percent on 12 days—coincidentally, 6 up and 6 down. Value and small-cap stocks tended to outperform their growth and large-cap brethren for the month, while foreign investments fared worse than U.S. stocks. The developed market MSCI EAFE Index fell by 3.20 percent in July, while the MSCI Emerging Markets Index lost 3.39 percent.
Commodity investments, collectively the highest-flying asset class thus far in 2008, came tumbling back toward Earth last month. Retreating prices for oil and other commodities drove the Dow Jones-AIG Commodity Index down by a precipitous 11.85 percent for the month—reinforcing the risks of investing too heavily in yesterdays winners.
Subprime exposure comes home to roost
Second quarter earnings releases by U.S. corporations reveal a tale of two economies. On the one hand, the energy sector has benefited strongly from the widespread spike in the market price of its production, leading to record-high profits for many energy-related firms. Other industries—though not immune from the effects of the housing downturn, the increasing cost of raw materials, and falling consumer sentiment—still managed to post modest gains in the most recent quarter. In contrast, financial firms—continuing the process of recognizing losses associated with mortgage-related investments and untangling themselves from various other ramifications—have seen their groups profits vaporize into staggering losses. The upshot is that second quarter profits reported to date for S&P 500 companies are 17.90 percent lower than the same period in 2007.
 Economy sputtering, not stalled
Despite the continuing drag of housing and financial system woes, the U.S. economy has proven to be surprisingly resilient. Benefiting from tax rebate checks issued as part of the economic stimulus package, initial estimates put gross domestic product (GDP) growth at 1.90 percent in the second quarter—a healthy rebound from a positive 0.90 percent in the first quarter and a decline of 0.20 percent in the fourth quarter of 2007. Consumer sentiment also ticked higher last month, rebounding slightly from the lows it had reached in June.
Declining home prices continue to be a concern going forward, but even that tide may be turning. While prices have declined by an average of 15.80 percent nationwide in the past year, according to the S&P/Case-Shiller Home Price Index, the rate of decline has slowed in recent months. In fact, 7 of the 20 major cities tracked by the index actually saw prices increase in May, the most recent month for which data is available. To further support the housing market, President Bush on July 30 approved Congress mortgage relief bill, which, among other provisions, makes available $300 billion of federal funds to help backstop mortgages that might otherwise be at risk of foreclosure. Any signs of a bottom in home prices would likely provide a major lift to consumer sentiment—and quite possibly stock prices—in this years second half.
- John Blood, CFA, Chief Market Strategist, Commonwealth Financial Network
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Disclosure:
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Dow Jones-AIG Commodity Index is composed of futures contracts on 19 physical commodities that are traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange. |
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