contact us site map login home

WHAT THE MARKET WANTS: June 2008

May was another very good month for the market, with all caps and styles up nicely except for the Dow Jones, which was off 1.4%, and the Russell 1000 Value Index, down 0.4%.

The Russell 2000 Growth Index led the way,with a 5.6% increase, while the Nasdaq sported a 4.6% return for the month. The average style-cap was up about 3% for the month, and growth resumed its strong pace of earlier this year, outperforming value even in large caps. (The Russell 1000 Growth was up 3.5%, which was about 4% ahead of the aforementioned slight decline by Russell 1000 Value.)

So the St. Patrick's Day rally, which began on March 17, seemed to look like a true turning point. Unfortunately, however, the market faltered coming down the stretch, led by the stumbling financial sector. Last month, we prognosticated that perhaps the worst was over for financials, and if so, that the sector might provide the buoyancy needed for the market to have a significant breakout. On that point, we were wrong.

The financial sector was by far the worst during the month, falling almost 3%. Making matters worse, S&P's downgrading of the credit rating of a number of key banks and investment banks on June 2 appeared to exacerbate the sector's current decline and perhaps even challenge the low it reached on St. Patrick's Day. Hopefully, we will be wrong again.

The key question is, will the two-month rally continue in June, especially in the energy, technology, and materials sectors? Or will the faltering of the financial sector and the looming recessionary and inflationary forces bring our late spring rally to a halt?

Unfortunately, there is simply no way to know at this writing. On one hand, there still seems to be plenty of cash on the sidelines, valuations seem generally reasonable, and the political and global turmoil seems to have at least partially abated. Yet problems within the financial sector could still ripple throughout the economy. We simply won’t know for a few weeks.

Meanwhile, the market continues to favor earnings momentum, GARP, analysts' upgrades and a number of other growth metrics. Value metrics continue to be somewhat out of favor.

Looking ahead, there is no reason to believe that energy, technology, and materials will not continue to lead the way as they have for the past several months. Unless, of course, recessionary fears grow, which will would likely turn the market toward more conservative sectors, such as consumer staples, utilities and health care. As you know, all three have been shunned by the market for the past three or four months. Clearly, the financial sector will remain at the bottom, in light of the last three weeks' news and market behavior.


Next update:  Second week of July.