July saw an easing to June’s market freefall, with the Dow (up 0.4%) and the S&P 500 (down 0.8%) slowing the decline that began last month. The Dow posted its first positive month since April, pulling the index out of bear market territory where it was for the majority of July.  Earnings season did little to bolster investor confidence, as second quarter numbers for S&P 500 companies indicated a growth rate of -20.4%.  Once the figure is finalized, it will mark the first time since Q2 2001 – Q1 2002 that the S&P 500 has recorded four consecutive quarters of negative growth.

Also impacting stocks in July were several releases of key economic data.  Driven by exports and government stimulus checks, second quarter GDP was reported to have grown at a 1.9% annual rate (0.5% below analyst estimates), following a weak 0.9% rate of growth during the first quarter.  The economy has proven to be surprisingly resilient in the face of several adversarial forces, including tighter credit, soaring energy prices, a tumbling housing sector, and consumer gloom.  The housing sector, while still declining, may be seeing a slowing to its dramatic downfall, as residential investment was shown to have declined a less severe 16% during the second quarter.  The labor market, however, showed signs of continued deterioration in July; unemployment increased to 5.7% during the month, a four year high, and the decline of 51,000 in jobs marked the seventh straight monthly decline for the US economy.  With inflation on the rise and wage data reflecting minimal increases, experts worry there may be a sharp drop in consumer spending in the coming months – a big detriment to the resiliency we have seen until this point.  Many see the situation for the US economy as bleak for the near future; recent performance has been largely propped up by increasing exports (up 9.2% this quarter) and stimulus checks, which may soon be wearing off.  Stronger fundamental indicators need to be restored before full confidence in the economy is warranted.

July saw a reversal of recent trends as the much-beleaguered financials led all sectors in the Russell 1000 at 6.0%.  The sector appeared to benefit from the SEC’s limit on short-selling Fannie Mae,Freddie Mac and 17 other large investment firms.  The oil and energy sectors, on the other hand, were the laggards across the capitalization spectrum, as oil was driven down from its near record highs in the $140s to the $120s. Consensus is mixed on whether this price correction is a momentary pause in oil’s climb higher, or whether there has been a fundamental shift in global demand.

International markets, both developed and emerging, continued their slump in July.  The story continues as it has for some time – weaker housing markets, weaker equity markets, higher consumer prices and high market volatility.  In contrast with prior months, however, crude oil prices and commodities in general slumped badly.  The MSCI EAFE index lost 3.2% and the MSCI Emerging Markets index lost 3.7% in July.    Small caps fared poorly, with the S&P/Citigroup EMI ex-US index losing 5.1% during July, as investors sought safety and greater transparency in larger cap stocks.  Within the MSCI EAFE index, energy and materials led the decline, falling 12.0% and 9.8%, respectively.  Financials rebounded slightly, gaining 0.4%, while health care was the best performing sector, gaining 2.8%.

The real issues for the economy are job growth and inflation. The employment data has been weakening for several months, and as of the start of July, the unemployment rate now stands at 5.7%. Economists and investors alike are focusing on the job markets because those will ultimately boost falling consumer confidence. A steadying in the employment picture can and will help the financial markets going forward. On the inflation front, both PPI and CPI have increased due to energy and agriculture price hikes. The positive news has been the reduction in crude oil prices by almost $20 from their high as demand in the US has slacked off. Even with the decline in oil, the inflation push will continue in the months to come and is high on the radar screen for the Federal Reserve.

The Fed remains on hold in its monetary policy after electing to keep rates unchanged on June 22. The Fed is not expected to move on rates until later in 2008, if at all. The tentative nature of the economy combined with the continued need for liquidity by institutional banks and brokers will keep the money tap running at a good clip, well into the last months of 2008. The Fed is attempting to balance enough money flow to maintain economic stability while not accelerating inflation. This balancing act will be very important to the markets in the months ahead.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.