Today I want to expand on the broad economic analysis of the first quarter of 2007 that I brought up yesterday and go into a bit more detail in the specific performance of various aspects of the capital markets.
Oil Prices
The first quarter of 2007 saw a significant swing in oil prices. At the start of the new year prices were around $64 a barrel but saw a sharp drop early on to close to $53 a barrel. After reaching early lows the price per barrel saw a fairly steady increase for the remainder of the quarter with and ending price just under $66 which was higher than when the quarter started. These higher prices did have an impact on the equities market and forecasts predict even further increasing prices in the second quarter.
Capital Markets Review
Both equity and bond markets were volatile during the first quarter primarily due to concerns over China’s red-hot economy and the ice-cold U.S. sub-prime residential mortgage market. Despite the rocky ride, both bond and stock markets ended up positive for the quarter.
Among U.S. stocks, mid and smaller cap stocks outpaced large cap stocks for the quarter. International stocks posted a strong 4% return driven in large part by the strength of the emerging market economies and the weak dollar.
Bond Markets Review
Bonds were volatile for the quarter, responding to some of the same economic concerns as stocks. Late February and Early March, investors avoided risker investments and fled to U.S. Treasuries.
Returns for most market segments were higher: as a measure of the broad bond market, the Lehman Aggregate Bond Index returned 1.5%. Government and corporate bonds were also positive, and in line with the overall market. Corporate bonds fared slightly better than the more secure government bonds.
By the end of the quarter, lower quality high yield bonds pulled away from the pack, and risk-taking investors were rewarded.
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 Markets Review
Major stock indices across different market capitalizations in the U.S. and abroad posted positive returns for the quarter and year. Small cap stocks had the strongest domestic returns for the quarter and year. Value stocks continued their reign over growth stocks regardless of capitalization. International stocks were also positive for the quarter with help from the declining U.S. dollar, but also by strong returns across most of Europe.
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.
