Centara Connection

Market Update

Mark Dossa, CFP®, Senior Portfolio Manager

Heavy mergers and acquisitions activity continued for much of the quarter helping push equity prices to substantial gains from March to June. After a slow start to the year, the S&P 500 rose 6.26% in the second quarter as investors decided not to sell in May and go away for the summer. As a result, the S&P and DJIA both hit all-time highs during the quarter. Investors warmed to the idea that the economy continued to grow at a measured pace and inflation remained under control.

Swings of more than 1% per day were more common in the past three months than investors have seen in quite some time. While bonds enjoyed a solid Q1 with the Lehman Brothers Aggregate Bond index rising 1.5%, prices fell in Q2 as investors feared rising global interest rates. Inflation continued to be the Federal Reserve’s main focus though core rates dropped as the quarter wore on. By the end of June, the core inflation rate dipped below 2% and into the Fed’s “comfort zone”. However, equity markets took the numbers in stride as fears that rising oil prices and continued growth may spark inflation in the coming quarters.

Corporate balance sheets remain in good shape as companies have more cash on hand than anytime in recent memory. As a result, we’ve seen an increase in stock buybacks and increased dividend rates. While liquidity became an issue in the past month, there is still a lot of available capital worldwide and corporate buyouts should remain firm for the next quarter or so. The residential housing downturn continued with further damage as a result of the sub prime mortgage lending business problems. With lax lending practices over the past few years, the rate of late payments and foreclosures has continued to increase during 2007.

At current levels, the S&P 500 trades at a P/E (price/earnings) ratio of approximately 16.5%. This is far lower than the rate it traded at in March of 2000 when it peaked at over 30%. With unemployment around 4.5% consumers continue to spend helping keep corporate profits positive. There is really no reason to expect an end to the current bull market though we should see a temporary pullback at some point this summer. The S&P finished the first half of the year with a total return (including dividends) of 6.96% and the Lehman Brothers Aggregate Bond Index returned 0.98%.

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