7/31/2019 2nd Quarter 2005 Commentary
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QUARTERLY COMMENTARY SECOND QUARTER 2005
A BULL VERSUS BEAR TUG-O-WAR
The stock market Bulls and Bears each had reason tofeel
vindicated during the second quarter. The stockmarket experienced
increased volatility as bullishoptimism and bearish pessimism about
the health ofthe economy took turns driving market
returns.Predictably, this uncertainty produced mixed
results.Economic sectors such as healthcare and technology,which
have long been in a funk, produced positiverelative performance.
Energy stocks, utilities,homebuilders, and realestate
investmenttrusts (REITS)
continued to improveupon their 1st quartergains.
Materialcompanies, consumerdurables and industrialstocks all
lagged, incontrast to the last several quarters.
For the first time in almost five years, growth-oriented stocks
outperformed their value-orientedpeers. In the 2nd Quarter, the
Russell 1000 GrowthIndex was up 2.8% while the Value Index was
up
1.7%. This change in market leadership is one thatwe feel will
continue. In 2000, the average P/E of thegrowth index was 51x,
compared to 21x for the valueindex. Today, the same P/E measure for
growth is21x while that of value is at 17x. Though we do notexpect
to see growth-oriented stocks trade at 50xearnings again, we are
compelled to believe, based onmultiple quarters of earnings
improvement, today thebest value resides in growth stocks.
Leading the charge in growth stocks in the 2ndQuarter were large
cap technology names; Intel
(INTC +12.5%), Texas Instruments (TXN +10.23%),Fiserv (FISV
+7.92%), Cisco (CSCO +6.82%) andOracle (ORCL +5.77%). IBM ( IBM
-18.59%), andfinancial stocks Goldman Sachs (GS 7.02%) andMorgan
Stanley (-7.88%) were all laggards.
Relative to the S&P 500, we have had anunderweight in the
materials sector. The sector as awhole has been a disappointment
thus far, but wehave used this weakness to add duPont (E.I.)
deNemours (DD). Furthermore, as the dollarcontinues its rally,
we are poised to increase ourexposure to international stocks.
The bond market continued last years trend withrising short-term
rates and falling longer-term rateswith lots of ups and downs
in-between. Theunwinding of currency bets by hedge funds and
otherspeculators impacted bond yields. Many investors
had significantpositions intended tocapitalize on the U.S.
dollar continuing tofall. Early in thequarter the
dollarbottomed, especiallyagainst the Euro. As aconsequence,
many
foreign currency and bond positions were sold, withthe proceeds
coming back in the form of U.S. dollarsseeking highly liquid U.S.
Treasury bonds. As aresult of this capital flight to liquidity,
yields onlonger issuances have decreased.
ECONOMIC STABILITYThe economy has produced quarterly GDP growth
ofat least 3% for eight consecutive quarters.Employment growth
continues, as indicated by theunemployment rate dropping from a
high of 6.3% inJune 2003 to its current level of 5.1%.
Moreover,throughout the first half of 2005, wage growth hasoutpaced
growth in consumption spending for thefirst time in years. Contrary
to the message beingsent by the performance of both the stock and
bondmarkets, the economy continues to improve.
Signs of inflation continued to be muted. Both theConsumer Price
Index (CPI) and Producer PriceIndex (PPI) declined during the
quarter and the PCEwas virtually unchanged at 1.6%. Though the
lasttwo data releases were better than expectations,strength in the
U.S. economy and weakness inEurope and Japan plus the continued
lopsided tradewith China resulted in our trade deficits increasing
toall time highs.
Index Performance Q2 05 YTD
Dow Jones Industrials -1.62 -3.64Standard & Poors 500 1.36
-0.81EAFE (international stocks) -0.72 -0.79Russell 2000 (small
stocks) 4.35 -1.23Lehman Intermediate 2.48 1.59Lehman Municipal
2.93 2.89
