 Market Commentary — Second Quarter 2000
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By Scott
Lummer
Chief Investment Officer, mPower
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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.
 Lummer's Logic Archives
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does not constitute any tax, investment or legal advice. Consult your financial, tax or
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