The Quarter in Review
The popular Wall Street phrase, “sell in May and go
away,” proved to be true once again
as equities sold off sharply in June, halting a gradual recovery
in stock prices that began
at the outset of the second quarter. The S&P 500 posted
gains of roughly 5% through
April and May before posting a decline of more than 8% in
the month of June. One has to
go all the way back to 1930, to the beginning of the Great
Depression, to find a June selloff
greater than the one we experienced this quarter. There are
many reasons for the
June swoon in stocks, but none has had a greater impact on
individual investor behavior
than the rising price of oil. At $140/barrel, oil prices
are now up 150% over the last 3
years, 100% over the previous 12 months,
and almost 40% since the
beginning of 2008. With gasoline
prices firmly above $4/gallon, it
costs more than $100 to fill the tank
on some of the most popular trucks
and SUV’s on the American
highways. As we enter the
summer holiday driving season
and oil prices remain high, it is
not surprising that Consumer
Confidence levels and stock prices
have dropped. The S&P 500
closed the quarter down about
3% and is now down 12% in the
first half of the year, its worst first
half since 1970. It is down roughly
20% from its October 11, 2007 peak.
The S&P 500 is now up only 14%, less than 3% annualized,
in the 4.5 years since
December 31, 2003. While few, if any, investors have positive
investment returns in the
first half of 2008, the performance of many value biased
portfolio managers has been
downright alarming. Value investors have been caught in the “value
trap” of buying more
of their existing holdings simply because the price of those
holdings have declined. This
has been particularly true with value investors who have
over-weighted financial services
stocks. Famed investor Bill Miller, who manages the Legg
Mason Value Trust portfolio,
appears to be caught in the value trap as his fund lost 11%
in the second quarter and has
declined a staggering 28.6% since the beginning of the year.
months,
and almost 40% since the
beginning of 2008. With gasoline
prices firmly above $4/gallon, it
costs more than $100 to fill the tank
on some of the most popular trucks
and SUV’s on the American
highways. As we enter the
summer holiday driving season
and oil prices remain high, it is
not surprising that Consumer
Confidence levels and stock prices
have dropped. The S&P 500
closed the quarter down about
3% and is now down 12% in the
first half of the year, its worst first
half since 1970. It is down roughly
20% from its October 11, 2007 peak.
The S&P 500 is now up only 14%, less than 3% annualized,
in the 4.5 years since
December 31, 2003. While few, if any, investors have positive
investment returns in the
first half of 2008, the performance of many value biased
portfolio managers has been
downright alarming. Value investors have been caught in the “value
trap” of buying more
of their existing holdings simply because the price of those
holdings have declined. This
has been particularly true with value investors who have
over-weighted financial services
stocks. Famed investor Bill Miller, who manages the Legg
Mason Value Trust portfolio,
appears to be caught in the value trap as his fund lost 11%
in the second quarter and has
declined a staggering 28.6% since the beginning of the year.