By Rodric E. Cummins, CFA , Senior Vice President and Chief Investment Officer

Global economic growth fueled strong corporate earnings and propelled the equity bull market well into its fifth year of advance in the first half of 2007. Healthy fundamentals, reasonable valuations, and a financial system awash in liquidity drove major equity indices to new highs. Equity markets in the U.S. advanced to record highs while climbing a wall of worry that resulted in increased volatility during the period. The Federal Reserve’s (“the Fed”) past monetary tightening campaign is now showing a noticeable effect on economic growth, which advanced at a meager 0.7% rate during the first quarter. Late-stage economic cycle jitters related to decelerating economic growth, inflation, rising interest rates, falling productivity, and bearish signals from central banks added to a growing level of uncertainty in the financial markets toward the period’s close.

Investors with globally diversified exposure to equity markets were handsomely rewarded during the period. Markets were led in the first six months of 2007 by stocks of non-U.S. companies, particularly those domiciled in emerging countries. Developed international markets, as represented by the MSCI® EAFE (Morgan Stanley Capital International Europe, Australasia, Far East) Index (Net), posted a return of 10.74% for the six months ending June 30. Emerging markets stocks returned 17.55% for the period, as measured by the MSCI® Emerging Markets Index (Net). U.S. stock markets also posted a strong first half as the S&P 500® index returned 6.96% for the six month period. The markets were not as kind to holders of publicly traded real estate securities. The most dramatic and sustained performance run in the history real estate securities came to an abrupt halt as the asset class suffered a major correction during the second quarter by posting a return of -9.45%, as measured by the Dow Jones Wilshire Real Estate Securities Index. Rising interest rates across the yield curve resulted in generally positive but modest returns for bondholders, as the Lehman Aggregate Bond Index posted a return of 0.98% year-to-date through June 30.

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All indices are unmanaged and not available for direct investment. Index performance assumes no taxes, transaction costs, fees or expenses. This update is prepared for general information only and it is not to be reproduced.