Yesterday I briefly discussed the broad economic indicators for the second quarter so today I want to go into a bit more detail and take a look at the overall performance and trends of the equity and bond markets.
Capital Markets Review
Virtually all major stock market indices ended the second quarter with strong positive returns. In the U.S. market the tech heavy NASDAQ had the best returns. With the continuing slide of the U.S. dollar the international equity market has outperformed the domestic counterparts for the first half of the year with a gain of more than 11%. On a more long term basis the recent trend for all asset classes has been strongly positive, although the 10-year returns are still hindered by the bear market.
Bond Market Review
The bond markets weakened in response to inflationary signals and the subprime mortgage market. Most bond returns ended slightly lower for the quarter, reflecting some of the turbulence and challenges faced by fixed income investments and higher interest rates overall. One bright spot in bonds were the lower quality high yield bonds which ended the quarter in positive territory.
Source: High Yield returns reflect the Merrill Lynch Master II High Yield Index. Total Bonds is represented by the LB Aggregate Bond Indes. All others reflect Lehman Brothers indicies.
Equity Market Review
Even with conflicting signals about the overall economy and inflation most of the major stock market indices ended the second quarter with strong positive returns. Large-cap stocks outpaced both mid and small-cap stocks for the quarter. An interesting trend has emerged during this period that shows regardless of market capitalization, growth re-emerged as a leading investment style over value for the first time in years.
Looking at the chart below you can begin to see that as we move toward the second quarter the margin between growth and value has diminished and YTD and in the second quarter especially we see growth stocks performing better. I have discussed the possible reversal from value to growth in the past and while it is still too early to tell, this could be the sign that it is indeed beginning to take place.
The indexes used to represent each investment style are as follows: Large Value: Russell 1000 Value Index; Large Growth: Russell 1000 Growth Index; Mid Value: Russell Mid cap Value; Mid Growth: Russell Mid Cap Growth; Small Value: Russell 2000 Value; Small Growth: Russell 2000 Growth; International: MSCI World Ex-US.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Thanks for the submission to the Carnival of Stocks. Large Cap Growth has been the drumbeat for a couple years now. Maybe it will play out in 2007. See you at the Carnival.
Head for the hills! Sorta...
I have also been waiting for that rotation back to growth stocks. In the meantime, I'm still heavily invested in value.
I'm with you, Brad. I'm a value investor myself and over the long-term I think if you were heavy on value vs. growth you'd still be in a great position. Unless we see another run like we had from around 1995-2000 I wouldn't see growth take a dominant role.
My equity mix is sitting at around 30% growth.
Regarding the growth/value reversal, I'll believe it when I see it. Many people say that they take turns leading and lagging, but over the long haul value has always held a clear advantage. With value lagging right now, it's just a signal to me to buy more in that direction. I also just believe that, fundamentally, it makes more sense to lean toward value.
With that said, I'll never lean too hard away from the middle. Right now I have a value tilt, but it's only maybe 60/40. Nothing too dramatic.