Market Commentary — 2nd Quarter 2000

By Scott Lummer
Chief Investment Officer, mPower

Instead of answering a reader's question this week, I thought I'd take the opportunity to ruminate on what exactly happened to stocks during the second quarter of 2000.

Stock values were very volatile during the period of April 1 to June 30, and, except for emerging markets, they ended the quarter down.

Two measures of large-company performance lost value during the second quarter — the S&P 500 lost 2 percent, while the Dow Jones Industrial Average lost 3 percent. However, smaller-company stocks did worse. The Russell 2000 Index of small-cap stocks lost 6 percent during the quarter, and the technology-heavy Nasdaq lost 14 percent. April was particularly turbulent, with huge daily movements at the beginning and middle of the month. International stocks fell by 2 percent, while emerging market equities rose 3 percent.

What Happened

There were two main factors that contributed to the market's decline during the quarter: changes in the technology sector and interest rates. Values of high-tech stocks soared throughout the late 1990s. However, in March 2000, many analysts expressed concern about high-tech valuations, and their concern persisted into April.

The Federal Reserve raised interest rates in April and May in an attempt to slow economic growth and reduce the potential for higher inflation. Analysts worried about how the higher rates would affect corporate profitability. However, as June drew to a close, several indicators suggested that the economy was slowing down, and the Fed decided during a meeting in the last week of June not to raise rates further.

Looking Ahead

There are two factors that could cause stock prices to decline further. First, while it seems unlikely that the Fed will increase interest rates again in the near term (unless there is surprising data showing a strong potential for high inflation), it is possible that past interest-rate hikes could still have a negative impact on corporate profitability. Over the next few weeks, most companies will announce their earnings for the past three months. If those reports show unexpected weakness in earnings, stock values will fall.

The second factor is the value of technology stocks. Even after their recent decline in value, concern remains over whether these stocks' prices are too high. Although soon-to- be-released earnings will shed some light on tech stocks' worth, most of this sector's built-up valuations are based on longer-term growth. The sector should continue to show a high degree of volatility for the upcoming year.

What to Do

Those of you who are faithful readers will know what I am about to say. mPower has always recommended broad diversification, and our advice continues to be based on this philosophy. We feel that this will suit investors particularly well during times of high uncertainty.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Market Commentary — 2nd Quarter 2000

By Scott Lummer
Chief Investment Officer, mPower

Instead of answering a reader's question this week, I thought I'd take the opportunity to ruminate on what exactly happened to stocks during the second quarter of 2000.

Stock values were very volatile during the period of April 1 to June 30, and, except for emerging markets, they ended the quarter down.

Two measures of large-company performance lost value during the second quarter — the S&P 500 lost 2 percent, while the Dow Jones Industrial Average lost 3 percent. However, smaller-company stocks did worse. The Russell 2000 Index of small-cap stocks lost 6 percent during the quarter, and the technology-heavy Nasdaq lost 14 percent. April was particularly turbulent, with huge daily movements at the beginning and middle of the month. International stocks fell by 2 percent, while emerging market equities rose 3 percent.

What Happened

There were two main factors that contributed to the market's decline during the quarter: changes in the technology sector and interest rates. Values of high-tech stocks soared throughout the late 1990s. However, in March 2000, many analysts expressed concern about high-tech valuations, and their concern persisted into April.

The Federal Reserve raised interest rates in April and May in an attempt to slow economic growth and reduce the potential for higher inflation. Analysts worried about how the higher rates would affect corporate profitability. However, as June drew to a close, several indicators suggested that the economy was slowing down, and the Fed decided during a meeting in the last week of June not to raise rates further.

Looking Ahead

There are two factors that could cause stock prices to decline further. First, while it seems unlikely that the Fed will increase interest rates again in the near term (unless there is surprising data showing a strong potential for high inflation), it is possible that past interest-rate hikes could still have a negative impact on corporate profitability. Over the next few weeks, most companies will announce their earnings for the past three months. If those reports show unexpected weakness in earnings, stock values will fall.

The second factor is the value of technology stocks. Even after their recent decline in value, concern remains over whether these stocks' prices are too high. Although soon-to- be-released earnings will shed some light on tech stocks' worth, most of this sector's built-up valuations are based on longer-term growth. The sector should continue to show a high degree of volatility for the upcoming year.

What to Do

Those of you who are faithful readers will know what I am about to say. mPower has always recommended broad diversification, and our advice continues to be based on this philosophy. We feel that this will suit investors particularly well during times of high uncertainty.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.