Market Commentary: July 2005

“The third quarter -- which stretches from July through the end of the summer -- is by far the worst quarter for stocks, with the S&P 500 gaining a whopping 0.1 percent, on average, in the quarter during the last 60 years, according to Standard & Poor's.”

Excerpted from “Summer Stock Stars”, June 3, 2005 by CNN-Money

There are seemingly countless “rules of thumb” about the stock market that reside in the fringes of the investment press, many of which are even reported in mainstream media. One example is the Super Bowl hypothesis, which observes that the stock market tends to rise when the NFC team wins and tends to fall when the AFC team wins. Clearly, any relationship between the two variables is coincidental. Often these are presented with a wink and a nod as if to suggest that the author understands that there is no fundamental causal relationship.

On the surface, some strategies may appear to have merit. The suggestion put forth in some quarters that equity markets should be avoided in the summer due to their historical underperformance during the period may appear reasonable in the simplest context. Nonetheless, it fails to consider the practical implications such as transaction costs and tax complications associated with exiting and re-entering the markets in a short period of time. It also fails to consider those times in which the markets actually perform well during that period, as they did in July.

After muddling through the first half of 2005, the domestic equity markets rebounded positively during July. The S&P 500 was up 3.7%, tipping its year-to-date performance back into positive territory at 2.9%. The Russell Mid Cap Index returned 5.3%, raising its return for the year to a market-pacing 9.4%. The Russell 2000 Index of small companies experienced the strongest surge, its 6.3% monthly gain also pushing the asset class to a positive return of 5.0% since the beginning of the year. International markets trailed the U.S. markets, as the MSCI EAFE Index rose 3.1% for the month. At 1.9%, international equity returns continue to trail the broad U.S. market for the year, despite increasingly favorable valuations abroad. This closed out a very volatile month for international stocks after the London bombings sent brief shock waves through the markets.

Conversely, bonds posted generally negative returns for the month of July. The Lehman Aggregate Bond Index lost 0.9%, reducing its 2005 return to 1.6%. International bonds fared slightly better with a 0.6% loss, and stayed ahead of the Lehman Aggregate with a 3.6% year-to-date gain. Fueled in part by the unpegging of the Chinese Yuan to the U.S. dollar, the yield on the10-year Treasury rose from 3.94% to 4.29% during the month. However, even with this increase, the yield curve remains flat as short-term rates also rose.

The first half of the year delivered mediocre results, providing little reason to expect strong results in July; such is the unpredictability of the capital markets. Rather than attempting to engage in short-term tactical moves or market-timing based on superficial observations about market theory, remaining committed to a long-term plan for the management of your portfolio affords the best opportunity for long-term success.