By Martin E. Landry, CFA, CFP®, CIMA®, Senior Investment Analyst

Stock prices rose impressively during the second quarter, in spite of contradictory signals about the economy, continued weakness in the housing market, and rising oil prices. Large capitalization equity benchmarks were solidly in positive territory, including the S&P 500® and Russell 1000® indexes, which gained 6.28% and 5.90%. Many indexes reached or surpassed all-time highs during the quarter. Returns from international equity markets generally outpaced U.S. stocks. The MSCI® All Country World ex-U.S. Index (Net), representing both developed and emerging international markets, turned in a 8.19% total return for the second quarter.

While the quarter was broadly positive, stocks wobbled late in the period as interest rates rose. The unraveling of two fixed-income hedge funds that invested in sub-prime mortgages also contributed to market jitters.

The broad U.S equity market as measured by the Russell 3000® Index posted a 5.77% gain for the second quarter. The small-cap oriented Russell 2000® Index was up 4.42%. For the quarter, growth stocks outperformed value across the market capitalization spectrum, due in large part to the underperformance of interest rate sensitive financial stocks. Cyclicals in such sectors as energy, industrials, technology and materials outperformed.

Investor interest in public real estate companies, which had peaked in early February, fell sharply during the quarter as funds rotated away from this sector. The Dow Jones Wilshire Real Estate Securities Index lost -9.45% for the quarter.

Developed international stocks, as represented by the MSCI® EAFE Index (Net), posted a return of 6.40% during the quarter. A weakening U.S. dollar accentuated returns for U.S. investors. Japan was the exception to stock market and currency trends, with its shares trailing other markets and the yen slipping. Emerging market stocks, as measured by the MSCI® Emerging Markets Index (Net), led all asset classes with a remarkable 14.96% return. As of June 30, this index was up nearly 45% over the preceding twelve months.

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