The movement of stock prices was upward mixed during the first quarter of 2004 but unexciting in comparison to the roaring stock market during the latter part of 2003.  While reports on economic activity and corporate profits remained upbeat, investors were much more cautious than in the prior year due to mediocre employment data, higher stock valuations, and rising terrorism fears.  Results for non-U.S. dollar securities were generally positive but mixed. Share prices rose sharply in the Pacific Basin and in the Northern Europe region but declined elsewhere in Europe. Emerging market equities were robust, led by markets in Eastern European countries. Meanwhile, interest rates declined in most developed countries during the quarter. Although positive economic news is often bad news for the bond market, the continued absence of any measurable inflationary threat allowed rates to trend lower.  The table on the other side of this page summarizes data for the quarter (reviewed below) and the twelve months ending March 31, 2004.

Equities Review

Stock prices in the U.S. ended moderately higher for the first quarter.  S&P 500 Index rose only 1.7%, but the S&P Mid-Cap 400 Index rose 5.1%, and the Russell 2000 Index of small capitalization (cap) stocks rose 6.1%.  These results indicate the markets favored small market cap securities over large.  There was also a bias favoring value over growth.  Real estate funds led U.S. stock-fund categories with an 11.9% rise. Within the S&P 500, consumer staples, energy, and utilities were the best performing sectors while information technology, materials, and industrials were the worst.  The return of the average diversified U.S. equity fund was 3.0% and beat the S&P 500 Index as active management outperformed passive. 

The U.S. dollar ended the period with little change from the previous quarter, down only .22% versus 19 currencies tracked by the J.P. Morgan Dollar Index.  Thus, currency gains or losses had little impact on the results of U.S. investors on a worldwide basis.  Outside of the U.S., the MSCI EAFE Index of developed foreign stock markets rose 4.3% during the first quarter. As in the U.S., smaller stocks performed better than larger stocks. There was not much evidence of style-based characteristics having a significant impact.  Japan’s economy was boosted by its proximity to China and by the resurgence in high-tech demand.  The Japanese stock market was carried upward and continued to show signs of emerging from its over a decades long slump.  Although growth picked up in developed Europe, albeit sluggish in Germany and France, the Madrid terrorist attacks raised concerns that the European recovery might stall.  Emerging markets continued to soar on expectations for strong global economic growth.  In particular, emerging markets that produce petroleum and a few key raw materials and those linked to the ramp up in capital spending on high-tech goods did especially well. 

Fixed Income Review

The lack of job growth gave fixed-income market an unexpected second wind at the start of 2004.  Contrary to most predictions, interest rates fell further during the first quarter, and U.S. Treasury funds gained 3.3%. Within the bond market, performance was fairly evenly dispersed. Investment grade corporate bonds had returns comparable to gains for Treasury bonds of similar duration, and mortgage backed and asset-backed securities marginally outperformed like-duration Treasuries.  High yield bonds rose 1.7% during the quarter as measured by mutual funds. Outside of the U.S., interest rates declined to varying degrees, and bond market performance was dictated by the unique combination of interest rate and currency changes for each country (for example, strong results of over 4% for U.S. investors in British bonds but negligible returns for European bonds). The Salomon Brothers Non-U.S. World Government Bond Index increased over the period by 1.6%.