US Market Report – Third Quarter

Welcome to the brave new world of low expectations. Although the market enjoyed brief periods of optimism during the third quarter, caution has generally been the word of the day.

Morningstar 12.10.2004
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Many investors have been sitting on the sidelines ahead of the November elections, waiting until the votes are counted before putting too much equity money on the line. The economic outlook has been mixed as well. On the plus side, inflation seems to be a less imminent threat than it was a few months ago; although oil prices remain historically steep at close to $50 per barrel, prices on other goods have been rising at a relatively temperate pace.

Economic news has generally been positive, with jobs growth accelerating in August and most other economic measures holding steady. The Federal Reserve has continued to gradually step up interest rates, implementing widely anticipated hikes of 25 basis points in both August and September. But nagging concern about the sustainability of

the recovery has kept the market from surging ahead.

High-profile earnings warnings from former consumer stalwarts such as Coca-Cola and Colgate-Palmolive have also weighed on investors’ minds. As a result, Morningstar's US Market Index finished the third quarter with a 1.82% loss. Year to date, the Index has gained just 2.01%—a far cry from the double-digit gains enjoyed in the 2003 market rebound.

Style performance

Continuing the trend of the past few quarters, value stocks [shares] have fared better than their growth counterparts, with Morningstar’s US Value Index gaining 1.74% for the third quarter, versus a 6.64% loss for the US Growth Index. Commodity-driven sectors such as energy and utilities have pulled ahead, but steep losses on tech stocks have kept the growth index in negative territory for both the quarter and year to date.

Morningstar’s Large Cap Index lost 2.00% for the third quarter, compared with a 2.36% loss for the Small Cap Index. Across all three capitalization ranges, value stocks consistently outperformed growth stocks. The Mid Value Index was the top performer for the quarter, gaining 2.17%, while the Small Growth Index pulled up the rear with an 8.65% loss.

Among individual stocks, ExxonMobil, Chevron Texaco, and General Electric were the biggest positive contributors to the US Market Index. Technology bellwethers such as Intel, Cisco Systems, and Microsoft were negative contributors, as were beverage giants Coca-Cola and PepsiCo. Merck plummeted by about 30% on the last day of the quarter after it announced that it was withdrawing pain and arthritis medicine Vioxx from pharmacy shelves due to concerns about its safety.

For a more in-depth look into market performance please click on the Morningstar Market Report via the link on the right.

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