Second Quarter, 2000
The beginning of the second quarter marked the peak and then
subsequent bursting of the tech sector stock market bubble. As the second
quarter ended, tech stocks as a group had rebounded somewhat, but remained at
levels well below their previous highs. As more high technology companies
announce reduced sales growth rates for the latter part of the year, this sector
of the economy is becoming more vulnerable to a further correction. When a
company disappoints the investment community with weaker-than-anticipated
earnings their stocks are "trashed." In these situations, declines of
30-50% in one day are common.
Technology stocks in our client accounts have declined in
general conformity with the current correction. Our general observation is that
technology stocks which are "long on promise" while generating large
operating losses now and for the next few years have declined the most. Other
tech stocks which may be profitable now but which have warned of slowing sales
growth for the rest of the year have also been hard hit.
Our asset allocation model continues to suggest
minimum weightings for stocks across all of our client accounts, from our most
conservatively managed to our most aggressive.
Interest rates experienced unusual movement during the second
quarter. Corporate and municipal bond yields increased (causing price declines)
slightly, but only for those bonds having maturities greater than five years. We
continue to keep bond maturities relatively short term in client accounts at the
present time –
typically less than five years. This conservative posture will limit bond losses
in the future if interest rates continue to rise.
Government bonds are experiencing the unusual situation of an
inverted yield curve. By definition, this means short-term bonds currently offer
higher yields to maturity than long-term bonds. As of June 30, a Treasury
security maturing in one year offered a yield of approximately 6.5% while a
30-year Treasury bond had a yield of 6.1%. This phenomenon has been brought
about by the growing budget surplus and the corresponding reduction in
outstanding long-term Treasury bonds. In the face of diminishing supply of
government bonds and growing concern over corporate credit quality, prices have increased and yields have declined. Long-term
government bonds have outperformed all other bonds and the stock market for the
year to date.