2nd Quarter 2003 Newsletter
In the best quarter for the market since 1998, the S&P 500 rose by 15.40%, while the Dow Jones Industrial Average rose 13.13%.  
International markets outpaced domestic markets, with the MSCI EAFE Index advancing 19.27%.  Despite the rush into stocks, bonds
performed well, with the Lehman Brothers Aggregate Index advancing 2.50%
1.

                                             Q2 2003 Index Returns




















Source: Wilshire Associates.
Past performance is no guarantee of future results

Stock markets opened the quarter on a tear, as the conclusion of the Iraq war provided the main source of investor enthusiasm.  A decline
in energy prices and rebound in consumer sentiment soon followed, setting the tone for a positive month in the markets.   First quarter
reports from corporate America were broadly positive, with S&P 500 companies posting 12% year-over-year earnings growth  as cost-
cutting measures seemed to take hold.   Preliminary First Quarter
real GDP growth was reported at 1.9%, just ahead of consensus
estimates of 1.8% .  Softer economic reports during the month were generally overlooked, as investors chalked up the weakness to
temporary effects of the War and higher energy costs.  By the end of April, the S&P 500 had returned 8.2% .

In the first week of May, investors shrugged off a somber update from the Fed, which characterized economic conditions as “disappointing”
and raised the specter of
deflation.   Economic data reported during the month was mixed, with consumer sentiment rebounding, but jobs
and industrial data showing continued signs of contraction.  Toward the end of the month, investors focused on the passage of Congress’
tax cut, which included a reduction in capital gains and dividend taxes for investors.  The increased fiscal stimulus raised hopes that the
economy might show signs of life before the 2004 elections.  For the month, the S&P 500 advanced 5.3%.  

Markets held their gains in June, though the momentum from April and May subsided.  Economic data showed a stabilization in economic
activity, rather than a continuation of the April rebound.  First quarter GDP growth was revised downward to 1.4% from 1.9%, causing full
year expectations to be ratcheted down.  In its June meeting, the Fed made a well-telegraphed cut in short-term rates to 1.0%.  The
Committee issued a cautious outlook, reiterating concerns about the pace of the recovery.  Markets softened somewhat in the last days of
the quarter, but the S&P 500 still chalked up a gain of 1.27% during the month.

We find it interesting that stock and bond markets seem to be predicting such divergent outcomes for the U.S. economy.  The run-up in
stocks would seem to insinuate that a strong economic recovery is on the horizon, and that accelerating earnings growth will justifying today’
s higher price/earnings multiples.  With the rally being fueled by the most speculative styles and sectors , it would seem that stock investors
are again betting heavily on a second-half recovery.  On the other hand, the bond market’s second quarter move would seem to presage a
continuation of the sluggishness that has characterized the last few years.  Bond investors seem to be betting that a weak economy and/or
deflation will continue to depress rates and potentially trigger additional Fed cuts.   

During this period of uncertainty, we believe that a well-diversified portfolio makes sense for most investors.  With leadership rotating (at
least temporarily) from U.S. markets to
international markets, and from large cap to small cap stocks, we believe a diversified approach that
considers all of these areas may be appropriate at this time.  We fundamentally believe that our investment management solutions offer the
breadth and depth to access the asset classes that will provide strong returns now and in the future.

Regards,



Robert Valentine




Endnotes:

1  Source: Wilshire Associates.
2  When excluding the energy sector—which benefited temporarily from the shock in oil prices—S&P 500 earnings growth was a more
modest 6%.  Source: First Call.
3  Source of estimates: Bloomberg.
4  Source: Wilshire Associates.
5  The market’s rally has been driven largely by smaller cap growth stocks and by tech and consumer discretionary sectors. These areas of
the market tend to have higher P/Es and more reliant on the overall economy’s health than less economically-sensitive stocks.  Source of
valuation data: First Call, S&P.
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