Market Commentary

July 7, 2008

2008Q2 Market Commentary

During the second quarter, global equity markets remained under pressure from a weak U.S. economy.  Stocks declined due to a rally in crude oil that fueled inflation concerns and additional fallout from turmoil in the credit market.  The S&P 500 ended the quarter down 3.2%, a level that represents a 12.8% decline since the beginning of the year.  The Dow Jones Industrial Average ended the quarter down 7.4%, a decline of 14.4% since the beginning of the year.

Despite hopes that the worst of the credit market turmoil had passed, financial stocks continued to be the worst performing sector of the market.  The Dow Jones Wilshire Bank index fell nearly 26% in the second quarter alone.

With a rally that sent crude oil to record levels, it is no surprise that natural resources stocks were the best performing sector of the market.  Utilities stocks were also more resilient than the broad market as the Dow Jones Utility index was able to post gains during the quarter.  Healthcare stocks also performed relatively well.  Both healthcare and utilities stocks are traditionally regarded as defensive sectors that can weather weak economic conditions.

International market returns varied greatly during the second quarter.  The stock market in Shanghai fell more than 21%, while the markets in Brazil and Canada posted gains for the quarter.  We remain overweight foreign stocks as they continue to provide exposure to economies that are growing faster than the U.S.

Valuations for stocks look attractive at current levels, with the U.S. market currently trading at a 12 month Forward PE ratio of 12.6 compared to a post 1990 average of 16.8.  Valuations in many parts of Asia and Europe are even more attractive, with some markets trading at a 12 month forward PE ratio of under 10.  By some measures stocks are as cheap as they have been since 2002, which was the year that equities began a substantial rally.

While further fallout from the credit market turmoil and the weakened U.S. economy is a very real possibility, history has shown that stocks tend to revert to their historical valuation averages over time.  With valuations considerably lower than historical averages, the current environment provides the opportunity to identify pockets of under-priced equities that have the ability to generate superior returns.