Recap of US Markets

June has ended, whew!

Amazingly enough, the major stock indexes closed at roughly the same levels as last Friday. After the sharp fluctuations this week – and many in a downward direction – one would have expected to see further stock deterioration at Friday’s close. But don’t get excited yet. The picture remains pretty ugly for the end of June (and the end of the quarter). The Nasdaq composite has performed the worst this year and has fallen by the largest amount since mid-May. Yet the Dow Jones Industrials – also known as the blue chip index – has also dropped fairly steeply over the past six weeks mainly due to corporate scandals. The Russell 2000, measuring small cap stocks, continues to outperform the rest of the market as its recovery, though paltry these past three weeks, has still been better than the other indexes.

Now what?

Bond investors have been whipsawed by the fluctuations in the equity market. When equity prices rise, bond prices have declined and vice versa. Bond market players, more than equity investors, are generally keyed to FOMC behavior. Earlier in the year, bond investors felt that the Fed would soon start raising its federal funds rate target because the economy was recovering. But since March, when equity prices and bond yields were at their highest levels of the year, investors have modified their expectations. By the beginning of June, it was becoming evident that the Fed was not likely to raise rates this summer.

Aside from the fact that Treasuries are tied to Fed behavior, they are also the securities of choice for safe-haven investment. As investors fled the equity market in June, Treasury yields have fallen.