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.