The 2nd quarter of 2006 was tough for virtually all market segments. The US market and international markets fell in May, but rebounded slightly in June. The S&P 500, the index measuring the 500 largest US stocks by their market capitalization, fell 2.3% for the quarter and the EAFE Index (a market value weighted index of the largest companies in Europe, Australia, and the Far East) declined .26% over the same period. Year to date, the S&P 500 and the EAFE were up 1.8% and 8.94% respectively.
What caused the drop? It started with comments made by new Fed Chair Ben Bernanke following the May 10th Federal Reserve meeting on the subject of inflation. For the first time, Ben did not speak in code as his predecessor Alan Greenspan always had, and actually used the word “inflation” in his speech. This sent the S&P 500 down 5%, while international markets got pounded nearly 10%. Then in June, the markets recovered slightly following comments where Bernanke did not specifically mention rate increases. It is amazing what a few simple words uttered by the Fed can do to world markets. As former Chair Greenspan has said, “I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said”.
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