|
Despite
the significant and dramatic developments over the quarter, both natural
and geo-political, most U.S. stocks posted gains during the third quarter.
U.S. investors appeared to increase their risk appetite, as shares in
the more aggressive portions of the market did especially well. Foreign
stocks, particularly emerging markets’ shares, rose significantly more
than their U.S. counterparts. Shorter-term interest rates rose consistent
with two additional Federal Open Market Committee rate hikes, while
longer-term rates rose in response to more evidence of higher inflation.
Both hurt bond returns.
Equities Review
Although
virtually all U.S. styles and sectors had positive returns, small capitalization
stocks outperformed large-cap stocks, while in a reversal of recent
history, growth stocks outperformed value stocks. U.S. large cap stocks,
represented by the S&P 500 Index, gained 3.6% during the quarter,
while small-cap stocks did better; the Russell 2000 Index increased
4.7% for the period. Energy shares were far and away the best performers.
Natural Resources sector mutual funds soared 22% due to the rise in
energy prices and increased demand for energy equipment and services.
Other well performing sectors during the quarter included utility shares,
gaining 7% on average, and even technology shares, which gained about
6% on average.
Non-U.S.
equities around the world rallied in the third quarter despite rising energy
prices and concerns about the global economy. The MSCI EAFE Index gained
about 10.4% in U.S. dollars. Japan’s stock market, with its highest local
currency performance since the first quarter of 1988, was the big reason
for the surge in the EAFE Index. Outside of Japan, most of the best-performing
countries were those with meaningful energy components, including Norway,
Australia, and Canada. The U.S. dollar declined during the period by a modest
-0.2% versus 19 currencies tracked by the J.P. Morgan Dollar Index. The
dollar lost versus the Canadian Dollar but gained versus the Euro, the Japanese
Yen, and the British Pound. Appreciation versus the latter three was only
1-2%, which mitigated the negative currency impact on foreign stock market
returns.
Emerging
market (EM) stocks jumped more than 17% during the quarter, the ninth increase
in the last ten quarters. Some of the strength in the EMs could be attributed
to their heavy raw-materials exposure. During the period every EM region
posted double-digit local currency gains.
Fixed
Income Review
After
what many considered surprisingly good performance during the second quarter,
bonds stumbled in the third. Interest rates rose about .50% (50 basis points)
across most of the U.S. Treasury yield curve. Thus, because bond prices
and yields move inversely, Treasury bonds declined during the quarter. The
Lehman Brothers (LB) U.S. Government Bond Index (with nearly a 1% decline)
had its second worst quarter in over six years. Although almost all sectors
of the bond market fell during the quarter, corporate bonds fell less than
Treasury bonds of comparable durations. Also, high yield bonds gained for
the tenth time in twelve quarters, supported by continuing economic strength.
Despite the broad market decline, investors continued to show a willingness
to take on some credit risk in return for higher yields.
Non-U.S. bond markets were mostly flat to negative as well. The LB Global
Aggregate Index fell .8% (in U.S. dollars) during the quarter. Canada was
the one developed country to offer strong returns to U.S. investors, thanks
to the rise in the Canadian dollar versus the U.S. dollar. Also, many emerging
markets bond markets had a good quarter as well. Again, these trends (a
preference for somewhat riskier assets in the search for better returns)
were consistent with other areas of the capital markets.
| Third
Quarter and Latest Nine Months |
| Table
of Stock and Bond Returns |
| |
|
|
Period
Return to 9/30/05* |
|
| |
|
|
Third
Quarter |
|
9
Months
Ending
9/30/05 |
|
| U.S.
Stocks |
|
| |
S&P
Index** |
3.6% |
|
2.8%
|
|
| |
Average
Diversified U.S. Equity Mutual Fund |
4.7%
|
|
4.3% |
|
| |
Russell
2000 # |
4.7% |
|
3.4% |
|
| |
|
|
|
|
|
|
| |
Sector
Mutual Funds |
|
|
|
|
| |
|
Technology
|
7.7% |
|
1.4%
|
|
| |
|
Health
|
7.0% |
|
7.4% |
|
| |
|
Communications
|
7.9%
|
|
6.3%
|
|
| |
|
Financial
|
1.5%
|
|
-0.6%
|
|
| |
|
Real
Estate |
3.3%
|
|
8.9% |
|
| |
|
Natural
Resources |
21.9% |
|
40.6%
|
|
| |
|
|
|
|
|
|
| Foreign
Stocks |
|
|
|
|
| |
MSCI
Europe, Australia & Far East (EAFE) ## |
10.4%
|
|
9.1%
|
|
| |
Average
Diversified Foreign Equity Mutual Fund |
11.1%
|
|
10.4%
|
|
| |
|
|
|
|
|
|
| |
Regional/Specialty
Mutual Funds |
|
|
|
|
| |
|
Europe
|
9.8% |
|
11.0% |
|
| |
|
Diversified
Pacific/Asia |
14.7%
|
|
14.5%
|
|
| |
|
Diversified
Emerging Markets |
17.3%
|
|
23.3%
|
|
| |
|
|
|
|
|
|
| U.S.
Bonds |
|
|
|
|
| |
Lehman
Brothers Intermediate Gov't Bond Index*** |
-.5% |
|
1.1%
|
|
| |
Lehman
Brothers Intermediate Credit Index ð
|
-.5% |
|
1.0%
|
|
| |
Intermediate
Municipal Bond Mutual Funds (National) |
-.3% |
|
1.3%
|
|
| |
High
Yield Bond Mutual Funds |
.6%
|
|
5.0%
|
|
| |
|
|
|
|
|
| Foreign
Bonds |
|
|
|
|
| |
Citigroup
Non-U.S. World Gov't Bond Index ### |
1.1%
|
|
-6.8%
|
|
|
|
|
|
|
|
| * |
Mutual
Fund return data are from Morningstar. |
|
| ** |
Capitalization-weighted
index of 500 very large U.S. companies. The 500 are chosen to
achieve a fair cross-section of U.S. industrial and service sectors.
Recent median capitalization of approximately $46 billion. |
|
| *** |
Lehman
Brothers index of U.S. Treasury bond total returns (i.e., interest
plus or minus change in price). Bonds in index have intermediate
maturity of about 4-7 years. No mortgage-backed securities included. |
|
| ð |
Lehman
Brothers index of U.S. investment grade corporate bond total
returns (i.e., interest plus or minus change in price). Bonds
in index have intermediate maturity of about 4-7 years. |
|
| # |
Index
of small U.S. companies. Recent median capitalization of approximately
$898 million. |
|
| ## |
International
stock index indicating return of large foreign companies of 21 major
developed countries (Japan, UK, and Germany have the highest weightings).
Returns are converted to U.S. dollars. No emerging market stocks
are included. |
|
| ### |
Citigroup
index of total return of foreign government bonds issued by major developed
foreign countries (Japan, Germany, France, and UK have the highest weightings).
Returns are converted to U.S. dollars. |
|
| Back
to Market Reviews |
|
|
