Fourth Quarter 2000 Market Review

The year ended with the same mixed markets that had characterized most of the year.  Technology and telecommunications stocks worldwide had mind-numbing losses, dragging down the major stock indexes.  However, many stocks with lower weightings in the indexes actually had good returns, and bonds also performed quite well around the globe.  The table on the other side of this page summarizes data for the quarter (reviewed below) and the latest 12 months (reviewed separately).

Equities Review

The deepening correction of tech and telecom shares worldwide (down about one-third for the quarter) caused by economic and earnings weakness and investor concerns whether valuations were justified grabbed headlines but was only part of the story.  The average diversified U.S. stock fund posted a loss of 7.9%, which was the worst result since the third quarter of 1998.  The poor performance was caused by heavy exposure to sinking tech and telecom stocks.  With a similar high allocation to these collapsing market sectors, the S&P 500 Index of large company stocks finished the quarter with a loss of 7.8%, including reinvested dividends.

Most funds missed the market’s pockets of strength, characterized by value stocks available at much lower ratios of price to earnings.  Funds specializing in tangible assets remained strong, buoyed by continuing high energy prices and fund inflows from the market’s crashing sectors.  The average real estate fund had a return of 3.3% for the quarter, and natural resource funds earned 5.4%.  Financials performed even better (plus 6.7%), benefiting from declining interest rates.

Against 19 currencies, the U.S. dollar was about unchanged, losing approximately .5%.  For foreign stock buyers, the small benefit of appreciating foreign currencies was swamped by declines in most stocks paralleling the retreat in the U.S.   Diversified international funds lost 6.0%.  Pacific region and emerging markets stocks suffered the most due to higher orientation to the slumping tech and telecom sectors.

Fixed Income Review

Markets continued strong for the fourth quarter in a row.  The Fed interest rates held steady and hinted at a possible easing (which it executed soon after the end of the fourth quarter).  Given favorable interest rate trends and economic storm clouds on the horizon, U.S. government bonds and quality municipals were havens for many investors, pushing interest rates down to their lowest levels in almost two years, and adding significant capital gains to the income return.  The average investment grade taxable bond fund earned 3.4% for the quarter.  On the other hand, U.S. junk bond funds had another miserable quarter, down 6.9%, as the weakening economic outlook hurt bonds of many high-leveraged companies, especially the telecoms.

Aided by decreasing yields and modest currency appreciation, international government bonds had a solid quarter.  They gained 4.0% based on the Salomon Brothers Non-U.S. World Government Bond Index.  Finally, the average emerging market bond fund gained only .6% on economic concerns leading to moderate rate increases. 

* 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 $90 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.

d                 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 $800 million.  Somewhat overweighted toward financial stocks.

##      International stock index indicating return of large foreign companies of 20 major developed countries (Japan, UK, and Germany have the highest weightings).  Returns are converted to U.S. dollars.  No emerging market stocks are included.

###      Salomon Brothers 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 US dollars.

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