Pessimists largely dictated the market's direction during the month of June, fitting for the dog days of summer. Financial stocks dominated the downward move, and the Dow Jones Industrial Average suffered the most. June began with the Dow teetering at the 11,000 mark, while the Nasdaq Composite Index fluctuated in a 300-point range, almost but not quite reaching 2300 at mid-month. After all was said and done, the Nasdaq finished up 2.7 percent in June. Market players spent most of the month digesting earnings reports, with profit warnings proving the rule and earnings surprises providing the exception. Investors also spent most of the month looking to the June 26-27 FOMC meeting to see if the Federal Reserve would provide more relief to stock prices. When the Fed lowered the federal funds rate 25 basis points to 3.75 percent, the market reacted negatively as investors had hoped for a larger cut. Friday the 29th saw the second quarter end with small pockets of optimism for the U.S. economy and continued hopes for a rebound in corporate profits. At the end, most investors weren't looking for a full-fledged rebound until the end of the year.

Sectors that continued to perform well included technologies, the consumer service side of retail, transportation, and health-care. The continued rise in technology shares remained centered in computer retailers, semiconductors, and software manufacturers. The improvement in computer retailer shares also helped the overall performance of the retail sector, which was somewhat flat after removing the technology component. Health care stocks rebounded after having dropped off in May, but it was transportation stocks that were the surprise of the month, finally showing some signs of positive performance. Financial and energy stocks continued to flounder and were responsible for most of the drop-off in the Dow Industrials, which is dominated by the two groups. Investors removed money from financial stocks as they waited to see how much the Fed would reduce the federal funds rate target, and wound up not being happy with the FOMC results. The Dow Industrials lost 3.9 percent on the month.

There were few major moves in June as economic data released during the month saw very little deviation from expectations, making corporate profits the chief factor behind what market moves there were. Technology stocks outperformed the rest of the market and helped the Nasdaq gain 2.7% on the month. Indices that cover more of the market also saw only small movements with the S&P 500 gaining 3.3% and the Russell 2000 up 2.6%. The market-encompassing Wilshire 5000 lost 1.7% on the month.

Treasury Market Catches Fire, FOMC brings the hoses
The market for U.S. Treasuries showed a lot of life at the beginning of June, as optimism for future rate cuts combined with several weak economic reports to spark a buying trend. Treasuries kept trading well with yields falling through the first three weeks of June. But the final week of the month (and the final week of the quarter) brought some signs of recovery for the economy, not to mention the pint-sized FOMC cut when the bond market was hoping for a full 50 basis points. Factory orders and consumer confidence showed gains on Tuesday the 26th while the disappointing rate cut followed on Wednesday the 27th. The week closed with the Chicago purchasing management survey, which showed some small signs of recovery for the region's depressed manufacturing sector.

The news combined to stop the Treasuries' upward trend, pushing yields higher across the yield curve for June. The 30-year bond actually closed the month 1 basis point down from its yield on May 31, while the 10-year note finished 2 basis points up. The 5-year note rose 3 basis points, the 2-year note 6 basis points up, and the 3-month bill finished June up by 2 basis points. The chart above shows that the yield curve was lower at mid-month than at the end of June.

Damir Fonovich, Economist, Econoday