Market Reviews 2008

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MARKET REVIEWS 2008

Fourth Quarter, 2008

The fourth quarter began with a violent selloff, from which global stock markets never really recovered. October began with Congress in the throes of debating the bill that ultimately became the Troubled Asset Relief Plan (TARP), the $700 billion bank bailout. The uncertainty surrounding TARP, along with the US presidential election and fears about the underlying soundness of the US financial system and economy, drove the US stock market down by 25% in the space of two weeks, after which it spent the balance of 2008 gyrating wildly, but without clear direction. The magnitude of the swings was smaller in December than in November, however, giving some market participants hope for more orderly markets in 2009 than in 2008. Nevertheless, for the fourth quarter, the index lost –21.9%. For the full year, it lost –37.0%, its worst calendar-year performance since 1931. Smaller stocks fared worse than larger ones during the quarter, and for the full year all capitalization ranges lost more than –30%. [Index returns: Standard & Poors]

As has been the pattern for most of the year, international stocks kept pace with the US market. In local currencies, the MSCI Barra EAFE International Equity index returned –18.6% for the quarter, and –40.3% for the full year. After months of gains against European currencies, the US dollar retreated sharply against the euro in December. It ended 2008 at $1.3919 to the euro, close to its level of $1.408 on September 30, and a bit better than the $1.460 level of December 31, 2007. The dollar continued its trend of weakening against the Japanese yen; it ended the year at 90.79 yen, off sharply from 105.94 yen at September 30, and 111.71 at the end of 2007. The dollar did continue to gain against the pound Sterling, ending 2008 at $1.4619 to the pound, compared to $1.780 at the end of September, and $1.984 at the end of 2007. With the dollar’s mixed showing against other currencies, the EAFE index returned –19.95% for the quarter, and –43.4% for the full year. [Index returns: MSCI Barra; Exchange rates: US Treasury]

Falling interest rates, particularly on US Treasury securities, provided a major financial markets story in the fourth quarter. During December the Fed Open Market Committee established a target range of zero to 0.25% for the Fed Funds rate. At year’s end, the two-year US Treasury note yielded just 0.76%, down from 2.00% on September 30, and 3.05% a year earlier. The yield on the ten-year Treasury also fell, ending the year at 2.25%, compared to 3.85% at the end of September and 4.04% at the end of 2007. As a result of the sharp drop in rates, the Barclays Capital US Aggregate Bond Index returned +4.57% for the fourth quarter, and +5.24% for all of 2008. [Index returns: Barclays Capital; interest rates: US Treasury]

December 2008

After a violent selloff in early October, which saw the S&P 500 index fall by 25% in the space of two weeks, the US stock market spent the balance of 2008 gyrating wildly, but without clear direction. The magnitude of the swings decreased in December, though, which gave some market participants hope for more orderly markets in 2009 than in 2008. For the month of December, the S&P 500 returned +1.06%, a welcome change, but not remotely enough to alter the sour tone of the market year. For the fourth quarter, the index lost –21.9%, and for the full year, it lost –37.0%, its worst performance since 1931. Smaller stocks did better than larger ones during December, but for the full year all capitalization ranges lost more than –30%. [Index returns: Standard & Poors]

As has been the pattern for most of the year, international stocks kept pace with the US market. In local currencies, the MSCI Barra EAFE International Equity index returned +1.22% for December, –18.6% for the quarter, and –40.3% for the full year. After months of gains against European currencies, the US dollar retreated sharply against the euro in December. The euro ended 2008 at $1.3919, compared to $1.269 on November 30, and $1.460 at the end of 2007. The dollar continued its trend of weakening against the Japanese yen; it ended the year at 90.79 yen, off sharply from 95.46 yen at November 30, and 111.71 at the end of 2007. The dollar did continue to gain against the pound Sterling, ending 2008 at $1.4619 to the pound, compared to $1.535 at the end of November, and $1.984 at the end of 2007. Largely because of the dollar’s weakness against the euro and the yen, the EAFE index returned +6.01% in US dollar terms for December, but it was still down –19.95% for the quarter, and –43.4% for the full year. [Index returns: MSCI Barra; Exchange rates: US Treasury]

Falling interest rates, particularly on US Treasury securities, continued to be a major financial markets story in December. At year’s end, the two-year US Treasury note yielded just 0.76%, down from 1.00% on November 30, and 3.05% a year earlier. The yield on the ten-year Treasury also fell, ending the year at 2.25%, compared to 2.93% at the end of November and 4.04% at the end of 2007. As a result of the sharp drop in rates, the Barclays Capital US Aggregate Bond Index returned +3.73% for December, +4.57% for the fourth quarter, and +5.24% for all of 2008. [Index returns: Barclays Capital; interest rates: US Treasury]

November 2008

If October was the month in which the market’s grinding downward progress gave way to a more precipitous drop, in November the market’s path felt more like a roller coaster ride. Volatility was the market’s general theme. Weak economic data; repeated shifts in the Treasury Department’s approach to supporting the banking industry; another massive dose of banking assistance — to Citigroup this time — and Congress’s cool reception when auto company executives came to Washington, hats in hand; all soured the market’s tone. The stock market seemed to have anticipated the bad economic data, but the other sources of uncertainty reinforced the market’s recent pattern of wild swings, especially at the end of the trading day. Continued weakness in commodity prices (oil fell from $67 per barrel to around $50) and a –1% drop in the consumer price index offered consumers some relief, but increased worries of a deflationary recession, which could be especially persistent and troublesome. By November 20, the S&P 500 had broken through its October 10 low, falling to 752, a drop of –22% in for the first three weeks of the month. It then turned around forcefully, adding +19% between November 20 and November 28. Nevertheless, the S&P 500 lost –7.18% for November. Smaller stocks generally suffered even more than larger ones, with the S&P Midcap 400 returning –9.3%, and the Small Cap 600 returning –11.7%. Among large stocks, growth performed a bit better than value. [Index returns: Standard & Poors]

The volatility continued to be global, as the MSCI Barra EAFE international equity index returned –4.7% in local currencies for the month. The US dollar was mixed against other currencies. The dollar slipped to $1.283 against the euro from $1.268 at 10/31. It strengthened to $1.535, from $1.617 at 10/31, against the pound Sterling, as signs of economic weakness in the UK became more pronounced. The dollar continued to slide against the Japanese yen, ending November at 95.41 yen, compared to 98.28 at 10/31. With the currency movements, the EAFE index returned –5.4% in US dollars for November. [Index returns: MSCI Barra; currency rates: US Federal Reserve]

Credit worries continue to plague the financial markets, as many investors have fled to the safe haven of US Treasury securities. In spite of massive new issuance of Treasury securities (during November, Treasury issued about $600 billion more in securities held by the public than it repaid [Bureau of the Public Debt]), particularly T-bills, to finance its interventions in the economy, yields on one-month T-bills were just 0.02% at the end of November. US Treasury rates fell in general, and the two-year Treasury note ended November at a yield of 1.00%, down from 1.56% on October 31. The 10-year US Treasury yield fell to 2.93% at 11/30 from at 10/31. As a result, the Barclays Capital US Aggregate Bond index returned +3.25% for November. [Yields: US Treasury; bond index: Barclays Capital]

October 2008

Volatility. Stock prices moved with disturbing violence throughout October, as the combination of poor economic data, election uncertainty, large mutual fund redemptions, and forced selling by leveraged market participants drove the US equity market to an intra-day low on October 10 and a closing low on October 27, before it recovered a bit at month’s end. In spite of Congress’s passage of the Paulson bank rescue plan on October 3, uncertainty regarding its implementation and effects also seemed to weigh on the markets. October had two different trading days, the 13th and the 28th, on which the S&P 500 rose more than +10%, but for the month as a whole the index fell –16.8%, bringing its performance for the first ten months of 2008 to –32.8%. Smaller stocks generally suffered even more than larger ones, with the S&P Midcap 400 returning –21.7%, and the Small Cap 600 returning –20.2%. The selling seemed indiscriminate, as value and growth performed about equally badly in each capitalization range. [Index returns: Standard & Poors]

October’s selloff was global. The MSCI Barra EAFE international equity index returned –15.5% in local currencies for the month. Currency movements were a major feature of global markets during October, as investors seeking safety in short-term US Treasury securities bought dollars. The US dollar rallied to $1.268 against the euro at 10/31 from $1.408 on 9/30. It also improved to $1.617 against the pound Sterling at 10/31 from $1.780 on 9/30. Across the Pacific, though, the yen strengthened even more than the dollar, so the US dollar ended October at 98.28 yen, down sharply from its level of 105.94 at 9/30. Apparently, during October many traders closed out “yen carry” trades, in which they had borrowed yen at low interest rates to buy higher-yielding assets in other currencies. The unwinding of a large volume of these trades seemed to be the main engine of so much buying in yen. With the currency movements, the EAFE index returned –20.2% in October, bringing its year-to-date performance to –43.5%. [Index returns: MSCI Barra; currency rates: US Federal Reserve]

Late in the month the Federal Open Market Committee lowered its target for the Fed Funds rate by half a point to 1.00%. This action largely reflected the movements of short-term interest rates in general. By the end of October, the yield on a one-month US Treasury bill had fallen to 0.12%, a level reflecting a desire more for safety than for return. Short-term US Treasury rates fell in general, and the two-year Treasury note ended October at a yield of 1.56%, down from 2.00% on September 30. Nearly all other interest rates rose, however, with the 10-year US Treasury yield rising to 4.01% at 10/31 from 3.85% at 9/30, and yields on bonds with higher credit risk remaining stubbornly high as well. As a result, the Barclays Capital/Lehman US Aggregate Bond index returned –2.36% for October. [Yields: US Treasury; bond index: Barclays Capital]

Some of the worst market signs we saw during October have finally abated somewhat. Bank lending finally seems to be improving, as 3-month LIBOR, an interbank lending rate that can be a proxy for banks’ willingness to lend, eased from above 4%, where it had stood for most of October, to less than 3.5% at the end of the month, and has fallen to just above 2.5% in early November. [British Bankers Association; Bloomberg]. The price of oil fell by nearly a third, from around $99 per barrel at 9/30 to about $67 at the end of October. Still, data on economic matters like industrial output, consumer spending, auto sales, and unemployment are very weak, suggesting that economic recovery remains some months away.

September 2008

The capital market landscape looked completely different at the end of September than at the beginning. Although the month began as a continuation of the slow, negative trend of the first eight months of the year, the atmosphere changed quickly. Over the weekend of September 6-7, the federal government placed Fannie Mae and Freddie Mac in conservatorship, effectively taking them over. The next weekend, Lehman Brothers declared bankruptcy, Merrill Lynch agreed to be acquired by Bank of America, and AIG agreed to take an emergency $85 billion loan from the Fed, on punishing terms. The following several days claimed Washington Mutual, which agreed to an FDIC-brokered takeover by JP Morgan, and Wachovia, which sold its bank-related assets to Citigroup. By that time, though, bank failures were just a sideshow compared to the Congressional wrangling and political posturing over Treasury Secretary Paulson’s proposed $700 billion plan to use public funds to shore up the credit markets. The House of Representatives set its vote on the Paulson plan for September 29. That morning, the traditional opening bell malfunctioned at the New York Stock Exchange, and the market's tone deteriorated from there. When the House voted down the measure, stocks fell hard, ending the day with a –9% drop (the Dow Jones Industrial Average fell by an unlucky –777.7 points, its largest single-day point drop ever). Even though the market recovered about half that amount the next day, for the disastrous month of September the S&P 500 returned –8.91%. Its return for the full quarter was –8.37%, and it has fallen –19.29% this year to date. The S&P Mid-cap 400 index returned –10.71%, and the Small Cap 600 index returned –7.19%. Value stocks outperformed growth stocks in all capitalization ranges, but returns were poor throughout the market. [Index returns: Standard and Poors] (Click on "Wall Street Vortex" to read Dr. Tiemann's most recent newsletter with an assessment of what is transpiring on Wall Street.)

International stocks shared in the distress of the global markets. The MSCI Barra EAFE international equity index returned –12.13% in local currencies (–13.02% for the quarter, and –26.67% year to date). At the same time, the US dollar rallied sharply against European currencies, although it eased a bit against the yen. It strengthened to $1.408 against the euro, compared to $1.467 at August 31. It also improved against the pound Sterling, ending September at $1.780, against $1.819 on August 31. The dollar slipped to 105.94 yen, from 108.69 yen at August 31. The currency movements further depressed returns for US investors in international stocks; the US dollar return on EAFE was –14.71% for the month of September (–21.05% for the quarter, and –31.07% year to date). [Index returns: MSCI Barra; currency rates: US Federal Reserve]

Interest rates on short-dated US Treasuries fell during September, but most other rates increased, as the cascade of financial failures heightened pressures in the credit markets. The yield on the two-year US Treasury note ended the month at 2.00% down from 2.36% on August 31. The ten-year yield ended at 3.85%, little changed from its August 31 level of 3.83%. However, bond prices fell overall, and the Lehman US Aggregate Bond Index returned –1.34% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

August 2008

Equity markets spent August bouncing around in a fairly narrow range. Volume was relatively light on most days, likely due to summer holidays, and several individual days had moves approaching or exceeding 2%, but these moves went in both directions, largely canceling each other out. The principal news for the month included discussion of public capital support for Fannie Mae and Freddie Mac, a continuation in the drop of the price of oil, and some early signs of stabilization in the housing market. Housing sales rose a bit, though inventories of unsold homes are still high, foreclosures make up a large portion of actual sales, and prices have continued to fall. For the month, the S&P 500 rose +1.45%. Mid- and small-capitalization stocks were stronger. The S&P Mid-cap 400 index returned +1.71%, and the Small Cap 600 index returned +4.17%. Value stocks outperformed growth stocks in the mid- and small-cap ranges, but lagged slightly among the large caps. [Index returns: Standard and Poors]

International stocks also stabilized during August. The MSCI Barra EAFE international equity index returned +1.02% in local currencies. However, the US dollar rallied sharply against European currencies, a move perhaps related to the drop in the price of oil. It strengthened to $1.467 against the euro, compared to $1.559 at July 31. It also improved sharply against the pound Sterling, ending August at $1.819 to the pound, against $1.981 on July 31. The dollar also edged upward to 108.69 yen, from 108.10 yen at July 31. The currency movements were the main story for US investors in international stocks; the US dollar return on EAFE was –4.05% for the month of July. [Index returns: MSCI Barra; currency rates: US Federal Reserve]

Interest rates fell markedly during August. The yield on the two-year US Treasury note ended the month at 2.36%, down from 2.52% on July 31. The ten-year yield also fell, ending at 3.83%, against 3.99% on July 31. Accordingly, bond prices rose overall. The Lehman US Aggregate Bond Index returned +0.95% for the month. [Index returns: Lehman Brothers; Treasury yields: US Treasury]

July 2008

For the first part of July, equity markets continued a slide that had begun in mid-May and persisted through June. The S&P 500 fell –5.00% from June 30 to July 15, and at that point the index stood nearly –15% below its levels of mid-May. From mid-July, however, the market responded favorably to a series of corporate reports indicating that earnings were not so awful as analysts expected, along with a sharp slide in the price of oil (from around $140 per barrel to around $125) and a pickup in merger activity. As a result, the S&P recovered ground and seemed headed for a small gain for the month, until weakness in the final hour of trading on July 31 pushed the index return negative again. For the month, the S&P 500 fell –0.84%. Mid- and small-capitalization stocks were mixed. The S&P Mid-cap 400 index returned –1.95%, and the Small Cap 600 index returned +1.97%. Value stocks outperformed growth stocks in all capitalization ranges. [Index returns: Standard and Poors]

International stocks continued their slide in July. The MSCI Barra EAFE international equity index returned –2.01% in local currencies. The US dollar gained against other currencies, a move perhaps related to the drop in the price of oil. It increased to 108.10 yen at July 31, up from 106.17 yen at June 30. Against the euro, it strengthened to $1.5589 (7/31) from $1.5748 (6/30), and against the pound Sterling it improved by a penny to $1.9806 (7/31) from $1.9906 (6/30). With the currency movements, the US dollar return on EAFE was –3.21% for the month of July. [Index returns: MSCI Barra; currency rates: US Federal Reserve]

Short-term interest rates eased during July, while longer rates held steady. The yield on the two-year US Treasury note ended the month at 2.52%, down from 2.63% on June 30. The ten-year yield held steady at 3.99%. Nevertheless, bond prices fell overall, as credit concerns outweighed the decline in Treasury yields. The Lehman US Aggregate Bond Index returned –0.08% for the month. [Index returns: Lehman Brothers; Treasury yields: US Treasury]

June 2008

The best we can say for the markets in June is that the month’s economic news did not seem to include any reports of the kinds of perils that could unhinge the markets and economy altogether. Even so, the persistent rise in the price of oil to the neighborhood of $140 per barrel, downgrades of the credit ratings of the most important bond insurers, and persistent worries about a possible upsurge in inflation, further declines in housing, and soft economic activity drove US equity markets steadily lower throughout June. At month’s end, the S&P 500 had fallen –8.43%, more than wiping out the gains the index had made in April and May. For the second quarter, the S&P 500 returned –2.73%, and for the first six months of 2008 its return was –11.92%. Mid- and small-capitalization stocks did somewhat better. The S&P Mid-cap 400 index returned –7.03% (+5.42% for the quarter, and –3.91% year-to-date), and the Small Cap 600 index returned –7.55% (+0.40% for the quarter, and –7.09% year-to-date). Growth stocks outperformed value stocks in all capitalization ranges. [Index returns: Standard and Poors]

International stocks performed just about as badly as their US counterparts during June. The MSCI Barra EAFE international equity index returned –8.89% in local currencies, bringing its return for the quarter to –0.88%, and for the year so far to –15.70%. The US dollar small moves against other currencies. It increased to 106.17 yen at June 30, up from 105.46 on May 31. Against the euro, it softened to $1.5748 (6/30) from $1.556 (5/31), and against the pound Sterling it slipped to $1.9906 (6/30) from $1.9793 (5/31). With the currency movements, the US dollar return on EAFE was –8.18% for the month of June. For the second quarter, EAFE returned –2.25% in US dollars, and year-to-date, –10.96%. [Index returns: MSCI Barra; currency rates: US Federal Reserve]

Interest rates eased slightly during June. The yield on the two-year US Treasury note ended the month at 2.63%, down from 2.66% on May 31. The ten-year yield fell to 3.99% on June 30, from 4.06% on May 31. Nevertheless, bond prices fell overall, as credit concerns outweighed the decline in Treasury yields. The Lehman US Aggregate Bond Index returned –0.08% for the month, bringing its return for the quarter to –1.02%, and trimming its year-to-date return to +1.13%. [Index returns: Lehman Brothers; Treasury yields: US Treasury]

May 2008

Financial conditions seemed to continue stabilizing during May, and as a result the market moved generally higher during the first part of the month. As the month progressed, however, continuing increases in the price of oil and other commodities created enough uncertainty among market participants to cap the stock market’s gains. Indications from the Federal Reserve that it may not lower interest rates further weighed on equity markets as well. The S&P 500 index had risen as much as +3.13% by May 19 but ended the month with a return of +1.30%. Smaller stocks did substantially better than large caps for the month. The S&P Mid-cap 400 index returned +5.29%, and the Small Cap 600 index returned +4.42%. While the S&P 500 is still negative year-to-date (–3.81%), the Mid- and Small-Cap indices are now both positive (+3.36% and +0.50%, respectively through 5/31). Growth stocks outperformed value stocks in all capitalization ranges. [Index returns: Standard and Poors]

International stocks also rose modestly during May. The MSCI Barra EAFE international equity index returned +1.25% in local currencies, bringing its return for the year so far to –7.47%. At least in part because of the Federal Reserve’s stance, the US dollar firmed modestly against other currencies. It increased to 105.407 yen at May 31, up from 104.167 on April 30. Against the euro, it strengthened to $1.5557 (5/31) from $1.5642 (4/30), and against the pound Sterling it improved to $1.9806 (5/31) from $1.9893 (4/30). As a result of the dollar’s strengthening, the US dollar return on EAFE was just +0.97% for the month of May. Year-to-date, EAFE has returned –3.03% in US dollars. [Index returns: MSCI Barra; currency rates: Yahoo! Finance]

Interest rates rose during May. The yield on the two-year US Treasury note ended May at 2.66%, up from 2.29% on April 30 and 1.62% on March 31. The ten-year yield rose to 4.06% on May 31, from 3.77% on April 30 and 3.45% on March 31. Bond prices generally fell as a result, and the Lehman US Aggregate Bond Index returned –0.73% for the month, trimming its year-to-date return to +1.21%. [Index returns: Lehman Brothers; Treasury yields: US Treasury]

April 2008

After the volatile, and generally negative, environment in the first quarter of 2008, market participants were understandably uneasy going into the second. A series of soft economic data releases, along with generally tepid corporate earnings, reinforced the general impression of slowing in the US economy. On balance, however, the weakness seemed to fall in a range that most market participants found tolerable, and the market reacted well to the lack of further nasty surprises. By the end of April, the Fed Open Market Committee was hinting that its quarter-point rate cut might be the last one for a while, and markets took the Fed’s posture in stride. Overall, equity markets posted a strong month: the S&P 500 index returned +4.87% for April (though it’s still down –5.04% year to date). The S&P Midcap 400 returned +7.70%, and the Small Cap 600 returned +4.01%. Growth stocks were stronger than value stocks in all capitalization ranges. [Index returns: Standard & Poors]

International equity markets were strong as well. The MSCI Barra EAFE international equity index returned +7.45% in April, though it is still off –8.62% year to date. Economic softness in Japan, combined with a sense that the Fed may soon stop lowering US rates, contributed to a strengthening of the US dollar against the yen and euro (though it held steady against the pound Sterling). The dollar rose to 104.167 yen (from 100.00 on 3/31) and $1.5642 against the euro (from $1.5785 on 3/31). It finished April at $1.9893 against the pound Sterling (from $1.9833 on 3/31). The dollar’s strength tempered international equity returns for US investors, and EAFE returned +5.43% in US dollars for the month (–3.96% year to date). [Index returns: MSCI Barra; currency rates: Yahoo! Finance]

Concerns about a possible flare-up in inflation, along with the Fed’s comments at the end of the month, contributed to a relatively sharp increase in interest rates (other than the Fed Funds rate). The two-year US Treasury yield ended April at 2.29%, up from 1.62% at the end of March. The ten-year yield also rose, ending April at 3.77%, compared to 3.45% at the end of March. As a result of these increases, the Lehman US Aggregate Bond index fell, returning –0.21% for the month. [Index returns: Lehman Brothers; bond yields: US Treasury]

March 2008

If you only looked at the market's final results for March, you might well assume that it had been a calm, quiet month. In fact, the markets in March were unusually turbulent, as the rapid contraction of the credit markets continued to send waves of trouble through the financial system. By March 14, the S&P 500 index had fallen by about –3%, as market participants tried to assess the nature and extent of liquidity-related problems. The critical point came over the weekend of March 15-16, and the issue centered on Bear Stearns. On March 14, the Federal Reserve announced the creation of a credit facility to support Bear Stearns, with JP Morgan Chase acting as a conduit lender. On Sunday, March 16, the same parties announced that JP Morgan Chase would acquire Bear Stearns at a distress price. The market’s initial response to this news was strongly negative, but on March 18 a 75-basis point cut in the Federal Funds rate, along with less-bad-than-expected earnings reports from Lehman Brothers and Goldman Sachs, seemed to reassure market participants that the worst danger was over, and stocks recovered sharply. By the end of March, the S&P 500 was close to where it began the month; the index’s total return for March was –0.45%. It was still a terrible quarter, though – for the three months, the index returned –9.45%, with mid- and small-capitalization stocks suffering slightly less severe losses. The S&P Midcap 400 returned –1.02% for the month and –8.85% for the quarter, while the S&P Small Cap 600 returned +0.41% for March, and –7.46% for the quarter. [Index returns: Standard & Poors]

Overseas markets suffered continuing declines during March. In local currencies, the MSCI Barra EAFE international equity index returned –3.83% for the month, bringing its performance for the quarter to –14.95%. The falling Fed Funds rate and the continuing flood of liquidity support from the Federal Reserve generally undermined the US dollar, softening the impact of the market losses for US investors. The dollar finished the month at 100 yen, having fallen from 103.96 yen on 2/29 and 111.396 on 12/31/07. Against the euro, it weakened to $1.578 (3/31) from $1.519 (2/29). At December 31, the dollar stood at $1.460 against the euro. The dollar fluctuated quite a bit against the pound Sterling, but actually ended the month at $1.983, a bit better than its 2/29 level of $1.989, and close to its 12/31/07 level of $1.985. As a result of the currency movements, the EAFE index returned –1.05% in US dollars for the month, and –8.91% for the quarter. [Index returns: MSCI Barra; currency rates: Yahoo! Finance]

Interest rates moved a bit lower during the course of March. The ten-year US Treasury yielded 3.45% at the end of the month, down from 3.53% at the end of February and 4.04% at 12/31/07. The two-year Treasury yield slipped to 1.62% (3/31) from 1.65% (2/29), but it’s down substantially from its December 31 level of 3.05%. The Lehman US Aggregate Bond index returned +0.34% for the month of March, and +2.17% for the first quarter. [Index returns: Lehman Brothers; bond yields: US Treasury]

February 2008

After a rough start, equity markets looked set to stage a reasonable recovery toward the end of February. Unfortunately, 2008 is a leap year, and as a result February was just a day too long. On February 29, weak readings on consumer spending and consumer sentiment, along with a continuation of the upward spike in the price of oil to over $100 per barrel and further weakness in the US dollar, discouraged buyers, and the US market fell by nearly –3% on the day. For the full month of February, the S&P 500 returned –3.25%, bringing its return so far in 2008 to –9.06%. Weakness in stocks extended to all capitalization ranges; the S&P Midcap 400 returned –1.86% for the month, and the Small Cap 600 returned –3.10%. Value stocks performed substantially worse than growth stocks; the S&P/Citigroup 500 value index fell –5.21%, while the S&P/Citigroup 500 growth index returned –1.30%. One market observer pointed out that the eight-year period from February 29, 2000 to February 29, 2008 has been the worst eight-year period for stocks since the 1930s. During that time the total return of the S&P 500 has been just +11.4%, an annualized return of +1.4%. [Index returns: Standard and Poors; eight-year calculation by TIA].

International equity markets fared somewhat better than the US market, but only in the relative sense that they lost less. The markets generally fared better in Europe than in Asia, and emerging markets had a surprisingly strong month, but markets all over the world fell on the last day of the month. In local currencies, the MSCI Barra EAFE international equity index returned –0.69% for the month. The US dollar weakened substantially during February, though, so US investors experienced gains in global markets. The dollar fell to 103.96 yen (2/29) from 106.43 yen (1/31). It weakened to $1.5193 against the euro (2/29) from $1.4877 on January 31, and stayed nearly steady against the pound Sterling, improving slightly to $1.9885 (2/29) from $1.99 (1/31). As a result of the currency movements, the EAFE index returned +1.43% in US dollars. [Index returns: MSCI Barra; currency rates Yahoo! Finance]

The bond market presented a mixed picture, as investors seeking safety drove yields on US Treasury securities lower, while bonds exposed to credit risk increased in yield (falling in price). At month’s end, the yield on the two-year US Treasury note stood at 1.65%, down from 2.17% a month earlier. The ten-year Treasury’s yield fell to 3.53% at the end of the month, from 3.67% at the end of January. In spite of the drop in Treasury yields, the Lehman US Aggregate bond index, which also includes corporate debt and mortgage-backed securities, among other issues, returned just +0.14% for the month. [Index returns: Lehman Brothers; Bond yields: US Treasury]

January 2008

January began with a sharp market decline, a persistent pattern of selling pressure that seemed to drive the markets lower each day. In the first three weeks, the S&P 500 fell by –10.7%. Finally, after Asian and European markets fell sharply over the Martin Luther King, Jr. holiday weekend, the Federal Reserve stepped in before the start of trading on Tuesday, January 22 with an emergency 75-basis point cut in its target Fed Funds interest rate. This move only briefly helped stabilize the markets, and they reached their low for the month later that day. The tone of the market improved, however, as news emerged suggesting that the weekend selloff may have been the result of trading irregularities at the French bank Societe Generale, and as corporate earnings reports continued to show moderate strength. The Federal Reserve also helped, making a further 50-basis point reduction in its Fed Funds target (it’s now 3%) at the Federal Open Market Committee’s regular meeting on January 30. Even with the late recovery, though, the S&P 500 index finished the month with a loss of –6.00%. All capitalization ranges showed similar results, though value stocks performed a bit better than growth across the board. [Index returns: Standard & Poors]

Stock markets fell around the world. The movements paralleled those in the US, with global stocks reaching their lows around January 22. For the month, the MSCI Barra EAFE international equity index returned –10.95% in local currencies. For US investors, a further weakening in the US dollar softened that loss to –9.24%. Among the major currencies, the dollar’s biggest drop was against the yen. It ended January at 106.28 yen, down from its 12/31/07 level of 111.40. The dollar also weakened to $1.486 against the euro (from $1.460 on 12/31/07). It was almost steady against the pound Sterling, closing January at $1.987 per pound Sterling, from $1.985 on 12/31/07. [Index returns: MSCI Barra; currency rates: Yahoo! Finance]

The Federal Reserve’s aggressive interest rate cut propagated across the yield curve, and rates fell at all maturities. At the end of January, the two-year US Treasury note yielded 2.17%, down from 3.05% at 12/31/07. Similarly, the five-year yield fell to 2.82% (1/31/08) from 3.45% (12/31/07), and the ten-year yield fell to 3.67% (1/31/08) from 4.04% (12/31/07). As a result, bonds performed well. The Lehman US Aggregate Bond Index returned +1.68% for the month. [Index returns: Lehman Brothers; Treasury yields: US Treasury]