With above average volatility, markets held their own through May. But increasing numbers of stories of loose corporate accounting and excessive executive greed caught up with and overtook investor confidence in June. Stock buyers have been voting with their feet in June and July sending markets down to levels not seen since 1997. The pervading sentiment is fear, which is always true at market bottoms. The occasional up day (Dow +311 one day late in June, surrounded by down days) suggest that there is still too much lingering (but fast fading?) optimism to mark a real bottom.
Trends to be Aware of
The Federal government is trying very hard to re-ignite the economy but the kindling is soggy. In addition to the 11 drops in short term interest rates that have run their course, all forms of money supply are increasing. M3 money supply, which measures large cash deposits, is at an all time high. Is the Fed now trying to encourage inflation? It is not such a wild idea. Rising prices would initially look like increased profits for corporations, thereby improving valuations (P/E ratios) and hopefully enticing cash back into corporate investments. Supply and demand is the only law of economics that consistently works. Demand for stocks has been shrinking.
What To Expect From Here
We said three months ago that stocks were not yet cheap, but since then prices have dropped by 20% (as of mid July). Valuation worries are temporarily behind us, but markets will not recover until consumer confidence returns. It is hard to see confidence returning until corporate misbehavior stories cease being front-page news. That will happen either with time or when more compelling stories take over.
Market bottoms are usually market by high volume selling, also called capitulation, when investors abandon all hope. We are closer to that time but not there yet.
Some Numbers for Comparison: The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 06/30/02.
|
Index |
What it Measures |
Last 3 Mos. |
Last 12 Months |
3 Years, Annlzd |
5 Years, Annlzd |
|
|
Standard & Poors 500 |
U S Stocks w/div |
-13.4% |
-17.99% |
-9.18% |
3.66% |
|
|
Russell 2000 |
Small Stocks |
-8.35% |
-8.60% |
1.67% |
4.44% |
|
|
Morgan Stanley EAFE |
Foreign Stocks |
-1.93% |
-9.21% |
-6.49% |
-1.26% |
|
|
Wiesenberger Tech/Comm. Funds |
Technology Funds |
-27.25% |
-44.33% |
-22.51% |
-1.40% |
|
|
Real Estate Inv Trusts |
Real Estate |
5.0% |
16.21% |
14.21% |
7.94% |
|
|
Lehman Bros. Ag Bond |
Bonds |
3.70% |
8.63% |
8.11% |
7.57% |
|
|
CPI |
Inflation |
0.90% |
1.37% |
2.78% |
2.39% |
|
Source: Weisenberger, Thompson Financial
