Fourth Quarter 2003 Market Review

The global economy continued to show marked improvement as 2003 closed.  As a result, domestic and international stocks rose sharply and for the third consecutive quarter.  Positive reports on consumer spending habits, housing starts, and manufacturing activity confirmed the strength of the U.S. economic recovery, and the annualized “core” inflation rate (Consumer Price Index excluding food and energy) reached a 37-year low in November. In the U.S. the broad market (using the Russell 3000, Wilshire 5000, and S&P 500 indices) rose about 12% during the fourth quarter. And while the strength of the economy resulted in higher long-term interest rates, it was good for corporate credit quality. Thus, corporate bonds helped generate mildly positive returns for aggregate bond indices in the fourth quarter.  Meanwhile, on-going gains by most developed country currencies versus the U.S. dollar contributed to enhanced returns for foreign stocks and bonds, which outperformed their U.S. counterparts for the third quarter in a row. The table on the other side of this page summarizes data for the quarter (reviewed below) and 2003 as a whole.

Equities Review

The fourth quarter rise in stock prices was very broad.  Some statistics on the breadth of the market’s fourth quarter rise include: only 15% of the stocks in the Russell 3000 declined in the fourth quarter, and only 6% lost more than 10%; the worst performing sector in the S&P 500 (utilities) rose almost 8%; and only two of 64 industries in the S&P 500 declined (airlines and biotech). Stylistically, value did better than growth, and smaller-cap stocks outperformed larger-cap.

The performance of foreign equity markets was similar to the U.S. , though considerably better for U.S. dollar investors thanks to the dollar’s drop: it ended the quarter down 3.1% versus 19 currencies tracked by the J.P. Morgan Dollar Index.  The MSCI EAFE Index gained about 9% in local currencies and 17.1% for U.S. dollar-based investors due to currency gains in the fourth quarter.  Most developed nations rose 15% or more in U.S. dollars, except Japan lagged somewhat because the perceived impact of a higher yen on the competitiveness of Japanese companies offset what appeared to be progress towards an economic recovery.  Most emerging countries benefited from the sharp expansion in the U.S. , particularly exporters of raw materials and high tech goods, and their equity markets posted robust gains during the fourth quarter, led by Turkey , Peru , and Brazil , with returns above 30%.

Fixed Income Review

Interest rates went up about 25-40 basis points in the fourth quarter as the economy continued to show signs of improvement and investors maintained their focus on stocks and higher yielding bonds. Still, while U.S. government bonds (Treasuries and Agencies) declined slightly during the quarter, all other sectors of the bond market rose.  The perceived credit quality of corporate bonds in general increased in response to the improved macroeconomic backdrop resulting in returns from corporate bonds and other spread sectors of the bond market that were significantly better than Treasuries.  High yield bonds continued on a tear, producing returns of about 5.6% as measured by the average junk bond fund. Like in equity markets, returns in foreign bond markets benefited from rising exchange rates versus the U.S. dollar. The Salomon Brothers Non-U.S. World Government Bond Index increased over the period by 6.7%. 

9 Months
Ending
9/30/03