After a volatile second quarter of 2006, the stock market ended the third quarter in an impressive fashion. The Dow Jones Industrial Average finished the quarter at 11,679, up 5.36% for the period, the biggest advance since 1995. Additionally, the S&P 500 closed at 1,335, up 5.66%, its best third-quarter performance in nearly a decade.1
This bullish sentiment was fueled by two primary factors. First, the Fed held interest rates steady after 17 consecutive increases, as the Fed Funds rate remained at 5.25% for the entire third quarter. Second, oil and gasoline prices decreased significantly during the quarter. Despite the shutdown of BP’s Alaskan pipeline, oil futures dropped from a high of $78 per barrel during the summer to $62.91 at the end of the quarter, representing a 14.9% drop for the period.2
Although the second quarter GDP growth came in below market expectations at a 2.6%3 annual rate (against a 2.9% consensus forecast), corporate earnings growth remains on track as the forecast for the third quarter operating profits for S&P 500 companies shows a 14.52%4 gain on average. The latest Consumer Confidence Index, posted in September, stood at 104.5 (1985=100)5 , a gain of 2.3 points from the previous month.
Within the U.S. equity markets, large-cap stocks outperformed small-cap stocks, and Value continued to outperform Growth in both the large-cap and small/mid-cap spaces. The only asset class with a negative return for the quarter was small/mid-cap growth, posting a decline of 1.20% as represented by the Russell
2500 Growth Index.
In the international arena, geopolitical tensions due to conflicts in the Middle-East have dissipated, although we continue to see violence in Iraq and nuclear plans developing in Iran and North Korea. World equity markets gradually recovered after a broad sell-off during the months of May and June, but still show signs of high volatility suggesting a heightened uncertainty among investors about the near term direction of international equity prices, partly due to concerns about the economic slowdown in the U.S.6 The MSCI EAFE Index for developed international markets gained 3.99% in the quarter, while the MSCI Emerging Markets Index was up 5.01% for the same period. The U.S. Dollar continued to show weakness against the Euro, down 7.11% for the year despite a 0.33% gain during the quarter, and has remained basically flat vs. the Japanese Yen for 2006 after a 3.07% recovery in the last three months.7
Finally, the bond markets recovered from a static second quarter, as the Lehman Aggregate Bond Index was up 3.81% for the period. During the quarter, the prices of U.S. Treasuries rose, taking the yield on the 10-year note and 30-year bond down to 4.63% and 4.76%, respectively, at quarter end.8 This was a reversal in the trend shown during the first half of the year, in which Treasury yields rose across the board and prices declined.
As we look toward the close of 2006, we remain confident in the strong capabilities and resources dedicated to the ongoing monitoring and management of your portfolio. As always, we welcome and look forward to the opportunity to spend time with you to address your unique financial goals.
1 Source: Wilshire Associates. These figures represent “Total Return” with dividends reinvested, which means the return includes not only the change in price for the securities in the index, but any income generated by those securities
2 Source: Bloomberg. Ticker symbol CL1. Price on 6/30/06 was $73.93, price on 09/30/06 was $62.91
3 Bureau of Economic Analysis of the U.S. Department of Commerce: Gross Domestic Product: Second Quarter of 2006 (final), released on September 28, 2006
4 Source: Bloomberg as of 9/29/06
5 Consumer Confidence Index of The Conference Board released on September 26, 2006. Based on a representative sample of 5,000 U.S. households
6 BIS Quarterly Review, September 2006
7 Source: Bloomberg quotes for the Euro (EUR) on 12/30/05 – $1.183, 6/30/06 – 1.2712, 9/30/06 – 1.2671; and Yen (JPY) 12/31/05 – 117.48, 6/30/06 – 114.63, 09/30/06 – 117.94
8 Source: Bloomberg, quotes as of 9/30/06