 April through June 2008 After a promising start to the second calendar quarter of 2008, with prices rallying impressively in April, US equities swooned in June and finished the quarter in negative territory. Large capitalization domestic equity benchmark indexes such as the S&P 500 and Russell 1000 posted quarterly returns of -2.73% and -1.89%, respectively. Those seemingly benign returns masked a roller-coaster quarter, however, and were not entirely indicative of the market strains that surfaced – or, in some cases, resurfaced – during the period. The S&P 500 Index had its worst June since 1930 and by quarter-end several major market indexes had either reached, or were approaching, 20% declines from their peak levels in late-2007 – a retreat that is commonly thought of as constituting a bear market. (For much of July, the situation worsened but very recently has stabilized to some extent.) Equity markets were punished in the quarter's later stages by a variety of "familiar suspects": record-high oil prices, anemic economic growth, housing markets still in a state of malaise, and a dimming outlook for consumer discretionary spending. On top of that grim macroeconomic landscape, equity markets were saddled by another volley of losses, or anticipated losses, at many financial services companies as the credit crisis continued to take a heavy toll. There were increasing signs during the quarter that Wall Street's problems were extending to the real economy, as consumer lending standards tightened, lending activity declined, and interest rates on mortgage and corporate loans rose. Venture capital investments were just one example of the impact of souring financial markets. According to the July 1, 2008 edition of The Washington Post, for the first time in 30 years, zero venture capital-backed companies made initial public offerings during the quarter. Unemployment edged higher as corporate layoff announcements ticked upward, new job creation remained tepid, and the difficulty of finding a job rose. Surveys of consumer and business confidence directly reflected the deep worries about the economic outlook, remaining at severely depressed levels. Stocks of insurance, investment banking, airline, and automobile manufacturing companies – among others – were devastated in the second quarter. Frontier Airlines, a Denver-headquartered carrier, skidded 88%. General Motors saw its stock price fall nearly 40% and reach a 34-year low during the second quarter. In the Financials sector, many companies' stock prices were pummeled, as illustrated below by a few examples:
Given the importance of the credit markets of late, we thought it appropriate to summarize some recent developments in this area. Bond markets were very active in the second calendar quarter of 2008. Long-term interest rates, as represented by the 10-year US Treasury note, ended June yielding 3.98%, about 55 basis points higher as compared to the end of the first quarter, but well below peak levels reached during the second quarter. Shorter-dated government debt instruments also saw their yields compress considerably, particularly in June. Thus far in July, government bond yields have fallen substantially. The decline in yields is potentially important on two dimensions: (1) that another "flight to quality" could be unfolding as credit worries reemerge, and/or (2) the bond market views higher inflationary pressures as transitory in nature given subdued US economic growth prospects. To the latter point, Treasury Inflation-Protected Securities (TIPS) spreads, which are one indicator of inflation expectations, declined modestly in the quarter. Thank you very much for the opportunity to be part of your investment program. |
Thomas F. Marsico
Chief Executive Officer
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