US stockmarket overview: markets in a holding pattern

As the second quarter drew to a close, the American stockmarket was more inclined to go out with a whimper than a bang.

Morningstar 23.09.2004
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After the gut-wrenching highs and lows of the past few years, this year’s market has been in more of a holding pattern. Investors held back ahead of a widely anticipated hike in interest rates at the end of June, and rising commodity prices have also prompted new worries about inflation. On the plus side, the economic recovery has generally been strong.

But the real test of a sustainable recovery lies with bottom-line profits, and investors have been in wait-and-see mode ahead of second-quarter corporate earnings reports due out in July. Add in the normal uncertainty of an election year, plus continued threats of terrorism and political instability in Iraq and other areas of the world, and you’ve got a wall of worry that’s tough to climb. As a result, Morningstar’s US Market Inde

x had a three-month gain of just 1.56% for the second quarter.

With optimism about the economic recovery weighed down with uncertainty, investors sought refuge in larger cap stocks. Morningstar’s Large Cap Index gained 1.73% for the second quarter, while the Morningstar Small Cap Index gained 1.36%. Among investing styles, value stocks generally fared better than growth issues, but size had a bigger impact on performance than style. Morningstar’s Large Core Index, which gained 2.60% for the quarter, was the top performer among the nine style indexes. The Mid Growth Index, which tracks the performance of fast growing small-cap stocks, brought up the rear with a 0.01% loss for the same period.

Among individual stocks, blue-chip names such as Microsoft, ExxonMobil, Johnson & Johnson, and General Electric were the biggest positive contributors to returns for the US Market Index. While most of these stocks have suffered lackluster returns for the trailing three-year period, recent performance has been stronger as investors have cast favor on big names with relatively predictable earnings. Thanks to the resurgence in online advertising revenue, Yahoo was another major contributor to index returns. EBay, which has continued to drive revenue growth by expanding into international markets, also contributed gains.

On the negative side, big banks and securities firms – including Citigroup, J.P. Morgan Chase, Morgan Stanley, and Goldman Sachs—suffered from worries about rising interest rates and lackluster returns in the equity markets. With several negative legal developments weighing down tobacco stocks, Altria was another drag on returns for the US Market Index. The stock doesn’t rank as one of the top 10 holdings in the index, but its 7% loss for the quarter still made it one of the biggest negative contributors to performance.

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