Market Update: Second Quarter 2005

By Julie Gross

On the final day of the quarter, the Federal Open Market Committee (FOMC) increased short-term rates another quarter of a percentage point. This was the FOMC's ninth quarter point hike since it started its inflation fighting program a year ago. The federal funds rate is currently at 3.25%, and the latest increase had been anticipated by the markets. Unemployment has fallen to a four year low of 5%, and this has been pushing up labor costs.

Market Update: Returns ending June 30, 2005 (%)
Returns ending June 30, 2005 (%)

Q205 YTD 1YR 3YR 5YR
S&P 500 1.4 -0.8 6.3 8.3 -2.4
Dow Jones Industrial Average -0.7 -0.8 10.8 9.1 4.4
Russell 2000 4.3 -1.3 9.5 12.8 5.7
MSCI World ex USA -0.8 -0.7 14.6 12.6 -0.3
Citigroup Gov't/Corp 3-7yr 2.8 1.3 5.0 5.7 7.5
Citigroup Gov't/Corp 1-3yr 1.2 1.0 2.2 3.0 5.0

Index returns for periods greater than one year are annualized. Source for returns: Zephyr Associates' Style Advisor program.

After producing weak results for the first quarter of the year, most U.S. stocks came back to produce positive returns for the second quarter, due in part to lessened fears about inflation and the anticipation of the end of interest rate hikes. Equity returns, however, still remain slightly down over the year to date.

Bonds also rallied in reaction to the mild news regarding inflation. Longer-term bonds outperformed short-term bond due to their added yield.

International markets were down slightly due to the U.S. dollar's strength compared to other currencies. Losses were minimal, however, and longer-term returns remain strong.

Market sectors

The real estate market continued to set records, and real estate-related stocks and mutual funds produced extremely strong returns. There appears to be some concern that there may be a "bubble" in the real estate market as the prices of homes and real estate-related stocks keep going up.

Oil prices were volatile during the quarter but finished higher at quarter end. Energy and utility stocks benefited and were strong performing sectors of the market. Technology stocks also produced strong returns for the quarter. The industrials and materials sectors were weak performers.

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