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Brian Rogers: We do not anticipate a recession

July 19, 2006

The U.S. economy remains healthy, and while we expect economic growth to slow in coming months, we do not anticipate a recession. Stock valuations are reasonable-neither too high nor compellingly attractive-and liquidity is good. We believe large-cap stocks offer better value than small-cap stocks at this time, and a number of stocks once regarded as growth stocks appear attractively priced. We particularly like selected health care companies, financials, several conglomerates, and various media and entertainment stocks. As always, we will continue to look for companies with attractive valuations and strong balance sheets that have boosted shareholder value by buying back their own shares or raising stock dividends.

During the second quarter, value stocks held up better than growth stocks across all market capitalizations. Among large-cap stocks, sector performance was mixed. Information technology and health care shares declined, but utilities, energy, and consumer staples posted gains. The Dow Jones Industrial Average had been up more than 8% for the year through May 10, when it began a steep decline well below the 11,000 level. A strong rally from mid-June through the end of the quarter pushed it back up above that milestone. The S&P 500 Stock Index was down, but to a far lesser extent than the Nasdaq Composite Index with its heavy component of technology shares.

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