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Fourth Quarter 2002 Market Review |
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U.S. stocks rebounded smartly in the fourth quarter. It was a very broad rally, as almost all sectors of the market gained. Foreign markets generally rebounded as well, but not as strongly. The bull market in bonds cooled off significantly in the fourth quarter. This reflected perhaps more optimism regarding the equity market and also a concern that yields may have simply fallen too far. The macro economic backdrop remained uncertain in the fourth quarter. It is difficult to assess whether the stock rebounds were an adjustment after panic selling in the 2nd and 3rd quarters or a vote of confidence for a brighter future, or both. The table on the other side of this page summarizes data for the quarter (reviewed below) and past 12 months. Equities
Review
U.S. stock prices were extremely volatile and mostly negative throughout 2002 but found strength in the fourth quarter of 2002. U.S. stocks rallied in the first two months of the fourth quarter, before giving a little back in December. Both value and growth indexes performed well. Other than the airline industry, many companies were quietly reporting better numbers, albeit off of already lower expectations. The communications and technology sector in particular experienced double-digit percentage increases over the previous period. Nevertheless, technology stocks remain the hardest hit and most volatile, and their bounce in the 4th quarter restored only a small part of their 2002 losses. International
equities followed a similar pattern, with
aggregate losses during the first three
quarters lessened by a rally in the
closing quarter.
The U.S. dollar declined against
other developed country currencies, ending
the quarter down 3.0% versus 19 currencies
tracked by the J.P. Morgan Dollar Index.
The MSCI EAFE Index gained 2.2% in
local currencies and 6.5% for U.S.
dollar-based investors due to currency
gains in the fourth quarter.
European and emerging equity
markets led the way, and Japan continued
to struggle. Fixed
Income Review
The
flight to safety ended, or at least took a
hiatus, during the fourth quarter.
Thus, Treasury interest rates were
mostly unchanged during the quarter, and
government bond returns were modest (plus
1.0%).
However, the sense of improved
corporate fundamentals was good for credit
bonds, and spreads declined on perceived
lower risk.
Quality corporate bonds had a good
quarter (plus 2.6%, including yield), and
high-yield credits offered almost 600
basis points of excess return over
Treasuries, one of their best quarters of
the past decade, as their interest rates
declined significantly (quarter return of
6.7% per Lehman Brothers index). Foreign
bond yields were mixed during the fourth
quarter. The strength of overseas currencies versus the
dollar, however, resulted in attractive
positive returns for most foreign bond
markets.
The Salomon Brothers Non-U.S. World
Government Bond Index increased over the
period by 6.1%.
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