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

The second quarter of 2008 started with a flurry of hope from investors perhaps believing that the worst of the credit crisis had passed. Both equity and bond markets responded with rallies as money returned to riskier assets and away from cash. Many believed that the Federal Reserve’s mid-March intervention to rescue investment bank Bear Stearns had set a floor under the financial markets. However, by the time the rally had extended into May, new worries had taken over. Alarming increases in the prices of gasoline and food left investors anxious over the economy and equity markets began to falter. As concerns over credit availability resurfaced, investors hastily dumped shares in financials.

The breadth of the markets narrowed as speculation in companies related to oil, energy, and other commodities attracted frenzied interest. However, the high price of oil began to weigh on just about every sector linked to the health of the consumer. By the first few trading days of July, broad equity market indices had officially entered “bear market” territory (down 20% or more from its recent peak).

The broad U.S equity market as measured by the Russell 3000® Index fell 1.69% for the second quarter while the large-cap oriented S&P 500® Index slipped 2.73%. In general, non-U.S. stocks fared a similar fate. The MSCI All Country World ex-U.S. Index (Net), representing both developed and emerging international markets, eased 0.74% for the second quarter.

Due in large measure to the outsized performances from energy-related stocks, growth stocks generated positive performance across the market capitalization spectrum for the second quarter. The large-cap oriented Russell 1000® Growth Index gained 1.25% for the quarter and the small-cap oriented Russell 2000® Growth Index was up 4.47%. In contrast, value stocks suffered under the weight of sinking financials. The Russell 1000 Value® Index dropped 5.31% while the Russell 2000® Value Index fell 3.55%. On a trailing one-year basis, the performance gap of growth over value widened to nearly 13%.

Investments in public real estate companies, including REITS, registered bigger declines than the broader markets for the quarter. The Dow Jones Wilshire Real Estate Securities Index stumbled 5.41%. This index remains down over 15% over the last twelve months.

Ramifications of the credit crisis and global inflation negatively affected dozens of equity markets around the world during the second quarter, but a few bright spots remained. Markets in Brazil gained over 18% while Russian shares added 11%. But for the most part, developed country international stocks moved in-line with U.S. returns. The MSCI EAFE Index (Net) fell 2.25% for the quarter. Emerging market stocks, as measured by the MSCI Emerging Markets Index, slipped just 0.86% for the quarter, with returns varying widely among the countries in this index. At the end of the second quarter, it was the only broad market equity index to generate a positive return over the last 12 months.

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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.