Anxiety leads to sell-off--and some buying opportunities.
Fears of inflation and uncertainty regarding the sustainability of corporate profits led to a market sell-off late in the second quarter. Volatility rudely imposed itself on investors accustomed to calm after the end of the bear market in 2002. All Morningstar diversified equity indexes posted losses for the trailing 13 weeks through June 22, and the Morningstar U.S. Market Index shed 4.3% over the same period, but still managed to eke out a gain of about 1% for the year to date. Once again, smaller-cap and more value-oriented indexes are outperforming for the year, posting gains for 2006 despite second-quarter losses.
Macroeconomic questions gripped the markets, as new Federal Reserve Chairman Ben Bernanke appears poised to raise rates at least one more time as of this writing, precisely as the economy appears to be slowing. Investors fear the Fed tightening too hard, sending the economy into a recession. They also fear a return of "stagflation" from the 1970s, when rising prices (partly due to higher energy costs) and a slowdown visited the economy simultaneously.
There seemed to be no place to hide, with foreign markets also declining, the Lehman Brothers Aggregate Bond Index falling over 1%, and the Dow Jones-AIG Commodity Index dropping from nearly 190 at its peak in May to below 170 on June 22. However, large, slow-growing companies weathered the swoon rather well. The Morningstar large-cap indexes held up the best during the bloodletting of the past month, with the small-cap indexes bringing up the rear.
This didn't catch Morningstar analysts completely by surprise. First, Morningstar's director of stock analysis Pat Dorsey reported that a variety of factors pointed toward investor complacency and the inexpensiveness of high-quality stocks. Second, mutual fund analysts have been hearing from their favorite managers that high-quality large-cap stocks haven't looked this cheap in a long time. Fund analyst Gregg Wolper reported that world stock fund managers had noticed topnotch U.S. companies selling at more compelling prices than their foreign counterparts.
The domestic-foreign debate continues, however, with Warren Buffett telling shareholders of his company, Berkshire Hathaway
Surveying the Sectors
Media dragged itself up off the mat, posting a 2.4% return for the trailing 13 weeks through June 22. The worst five-year performing sector, media bounced back to the satisfaction of Morningstar analysts, who have viewed newspapers and other media enterprises as cheap for some time. Tribune
Media conglomerate Liberty Global
Software brought up the rear, dropping 10% for the trailing 13 weeks through June 22 and more than 5% for the year to date. Salesforce.com