Recap of US Markets

Stocks rally ‘round the flag!

The early part of the week was just miserable for the equity market. Whether it was earnings warnings or new accounting mishaps or just plain fear, equity prices slid yet lower on Monday and Tuesday. Historically, equity investors ride up prices on the eve of July 4 in anticipation of the celebration. The gain on Wednesday was perfunctory. What the market did celebrate was the absence of a major terrorist attack during our Independence Day celebrations. Friday’s relief rally was strong, helped further by news that the Securities and Exchange Commission will begin holding CEOs of large public companies liable for the accuracy of their companies’ financial statements.

Stock prices were all higher on Friday from the Wednesday close, but the picture for the week as a whole looks a little different. The Nasdaq composite and the Russell 2000 were both lower for the week. But the S&P 500 was unchanged while the Dow Jones Industrials posted their highest Friday close since June 14. It was blue chip stocks that benefited the most in the post July 4^th celebration.

The Russell 2000 showed some unusual volatility this past week. In June, the Russell group considers which companies need to be added or deleted from its 2000 small-cap sector. Preliminary data is announced so that portfolio managers who are tied to this index can adjust their portfolio appropriately. In the past few years when the market was on an incline, the Russell 2000 didn’t seem to be hurt by the changes and July 1^st – when the changes go into effect – showed the same upward trend as usual. This year was different. The re-balanced Russell saw a sharp fall on its first trading day this past week. Many hedge funds simply bought the new additions to the group to benefit from the short run-up in prices, but then dumped the stocks after the inclusion. Friday was the first day this week that the Russell posted a gain. Nevertheless, one can see from the chart above, that this Friday’s close was significantly below a week ago. Until last week, the small cap sector was outperforming the rest of the market. It may yet regain its former status if the equity market stages a summer recovery or Friday’s celebration is repeated.

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The Treasury market has generally moved in tandem with stock prices these past several weeks. As stock prices have declined, bond prices have risen (and yields have fallen). Friday’s rally in the stock market led to rising bond yields (and falling prices). Even with the rise in yields on Friday, current levels are still well below the highs reached in March (coincident with the stock market’s best levels of the year).