May 5, 2004 — April was a cruel month for domestic equity funds, but the market is likely to show solid gains for 2004 overall, says Sam Stovall, chief investment strategist for Standard & Poor’s.

Higher interest rate prospects and presidential election politics were largely responsible for domestic equity funds’ losses in April, noted Stovall. All fund style categories were in the red for the month, as well as the S&P 500.

A negative reaction on the part of investors to monetary and political trends is reflected in domestic equity funds’ modest 0.84% gain this year through April, and in the category’s sharp 2.85% decline in April.

While the market typically gains in presidential election years, so far in 2004 results are weak since election year gains are generally concentrated in the second and third quarters, Stovall notes.

More defensive value-oriented mid- and large-cap fund categories held up better in April. So far this year, value offerings have generally outperformed, with the small-cap value category continuing to lead the way.

Outlook

The improving economy is likely to boost equity returns going forward, particularly in more defensive areas, Stovall forecasts. This is likely to spur earnings, which should fuel strong equity returns.

Stovall predicts the S&P 500 will likely be up 9% in 2004 reaching 1215 by yearend. The rise is somewhat less than Standard & Poor’s previous forecast of a gain of 11% for 2004 because of investor concern over higher interest rates. While higher rates may lessen equity returns this year, investors are still likely to favor stocks over bonds because of strong economic growth and good earnings prospects, Stovall forecasts.

This year’s biggest earnings gains will probably come in the technology and materials sectors, followed by the consumer discretionary, health care, and industrial sectors, Stovall predicts. Since they are economically sensitive, these sectors are likely to post the strongest earnings increases due to the economic recovery.

Fund Investment Style Average Returns

2004 Through

4/30/04 (%)

Large-Cap Growth -1.00%
Large-Cap Value +0.46%
Large-Cap Blend -0.20%
Mid-Cap Growth +0.16%
Mid-Cap Value +1.85%
Mid-Cap Blend +1.23%
Small-Cap Growth -1.31%
Small-Cap Value +2.17%
Small-Cap Blend +1.60%
Domestic Equity Funds* +0.84%
S&P 500 Stock Index -0.01%
Fund Investment Style Average Returns

April 2004

Large-Cap Growth -2.34%
Large-Cap Value -1.96%
Large-Cap Blend -2.15%
Mid-Cap Growth -3.68%
Mid-Cap Value -2.93%
Mid-Cap Blend -3.09%
Small-Cap Growth -5.05%
Small-Cap Value -3.54%
Small-Cap Blend -3.73%
Domestic Equity Funds* -2.85%
S&P 500 Stock Index -1.68%

*Excluding sector and balanced funds.

Source: Standard & Poor’s. Total returns include reinvested dividends. Data as of 4/30/04.