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Perspectives in Value
Market Commentary July 2008

Stocks entered bear market territory in the second quarter, as the S&P 500 Index declined 2.73%. In the six-months ended June 30, the S&P 500 has fallen 12%. This brought the total decline of this index since the October 2007 high to the 20% level commonly thought to signal a bear market. The Merrill Lynch domestic Master Bond Index also declined 1.14%.

A sharp spike in energy prices pressured stock and bond markets as spot oil prices shot up from $101.58/bbl to $140/bbl during the quarter, while natural gas rose to $13.35/mbtu from $10.10/mbtu. In this environment, only energy and materials stock showed gains during the quarter. Consumer confidence plummeted in response to $4.00/gallon gasoline, sending the Conference Board of consumer confidence to 50.4, one of the lowest readings on record. Investors’ sentiment followed suit, and after a brief rally, equity prices have slipped under the lows reached in March.

We continue to anticipate a protracted period of weak consumer spending and falling real estate prices. While these trends will be somewhat offset by stronger exports, overall we expect virtually nil economic growth into 2009. This will almost guarantee a higher “pain index” for several more months, as unemployment and foreclosures rise against a backdrop of higher prices for most essentials, especially food and energy.

Against this catalogue of woes must be set the attitude of the Federal Reserve, which is accommodative, and is likely to remain so, as were are in an election year and the financial system remains fragile. With an accommodative monetary policy, the financial system and real estate market will gradually mend, and the burden these problems place on the financial markets and economy should slowly dissipate.

John E. Maloney
06/30/08

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