Major Indexes Post Losses In Half, But Key Sectors Gain
On Wall Street, what you see in terms of first-half stock market performance is not necessarily what you got.
You probably did better.
Major market indexes closed out the first half on Friday with a rally, but they still posted losses for the period.
The Nasdaq composite index, up 2.3% to 3,966.11 on Friday, remains off 2.5% from its close at the end of 1999--after riding to record highs in the first quarter, then crashing in April and May.
The Dow industrials gained 0.5% on Friday to 10,447.89, but still are off 9.1% from last year’s close. A sudden surge of buying in some ignored “old-economy” stocks in late March and early April, as money poured out of technology shares, petered out in May and June.
Nonetheless, the market’s extraordinary turbulence in the first half failed to translate into a net loss for the average stock mutual fund. Preliminary data from fund-tracker Morningstar Inc. in Chicago show the average stock fund was up 3.8% in the half, surrendering about three percentage points of the 6.8% gain achieved in the first quarter alone.
The typical fund’s positive return in the first half owed itself to two things: First, some technology sectors, even with their second-quarter plunge, didn’t give up everything won in the first quarter.
Second, when tech stocks fell out of favor in the second quarter--dragging the Nasdaq composite index down more than 37% from its March 10 peak to its May 23 low, before the rebound of recent weeks--some other key stock sectors began to shine.
The “OSX” index of 15 major oil field services stocks, for example, gained a net 39.9% in the first half, as oil and gas prices shot up and stayed there.
The Standard & Poor’s index of major drug stocks posted a 30% first-half gain, most of which occurred after tech stocks began their plunge in mid-March.
Perhaps most surprising was the performance of small- and mid-capitalization stocks. Those sectors fell with Nasdaq in late March and early April, but proved more resilient as the second quarter wore on.
The S&P; mid-cap stock index eased 3.7% in the second quarter (compared with Nasdaq’s 13.3% drop) but still posted a first-half gain of 8.3%.
The S&P; small-cap stock index posted a gain of 0.8% for the quarter and was up 6.5% for the half.
Clearly, many of those investors who decided to stay in the stock market in the second quarter opted to spread their money among more sectors--a big change from the fourth quarter of last year and the first quarter of this year, when tech seemed to be the only bet anyone wanted to make.
But over the last month many technology stocks have rebounded, while the hot sectors of April and May, such as utility stocks and real estate investment trust shares, have cooled considerably.
On Friday, Nasdaq’s 2.3% gain came amid the heaviest trading volume since May 24, as more than 2 billion shares changed hands.
Meanwhile, the Dow utility stock index fell 2.5% on Friday, and REIT shares also tumbled. Traders said some institutional investors were rebalancing their portfolios, taking profits in some old-economy shares and redeploying the money into tech stocks and other issues.
Many market pros say the most likely scenario for stocks in the second half is a continuation of the sector “churning” seen in the first half. In other words, amid ongoing uncertainty about the economy’s strength, the inflation outlook and the Federal Reserve’s plans for interest rates, active investors may keep running from stock group to stock group in search of action--and to keep from being too heavily invested in any one sector that might suddenly take a dive.
In the next few weeks, investors will be looking for more signs that the economy is slowing. That could cement the view that the Fed, which left its key interest rate unchanged at this week’s meeting, is finished with its year-long credit-tightening campaign, analysts say.
At the same time, second-quarter corporate earnings reports will be closely watched for signs that the economic slowdown so far hasn’t sapped companies’ ability to turn a decent profit.
Meanwhile, U.S. investors who had money in foreign markets in the first half may have wished they had just stayed home. After strong gains in 1999, many foreign markets fell sharply in the first half. Asian markets were particularly hard hit: Japan’s Nikkei-225 index dropped 8.1% in yen terms; South Korea’s main index slid 20%.
In Europe, markets were mixed in the half. The Italian market rose 8.7%, while the German market eased 0.9%. For U.S. investors, foreign returns were further hampered by the strong dollar for much of the half. Lately, however, the dollar has weakened against the euro and the yen.
On Monday U.S. markets will be open for a half day, before closing for the July 4 holiday. Trading will resume Wednesday.
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The dive in technology stocks in March and April helped drag down major stock indexes for the second quarter and the first half. Yet many diversified portfolios fared far better than the indexes, thanks to strength in non-tech sectors.
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