August 2012 Recap

Hello, and welcome to the State Farm market recap audio broadcast. Each month, we offer a perspective on recent events impacting the financial markets in the U.S. and abroad. This is the recap for the month of August 2012.

Equity markets advanced for a third consecutive monthly gain in August as investors closely watched for signs the Federal Reserve would launch another round of bond buying or “quantitative easing” to stimulate the struggling U.S. economy.

Let’s first review the U.S. equities markets.

In the U.S., stocks advanced as the world’s largest economy continued to show signs of gradual economic expansion with improvements in retail and housing sales out-weighing the weakness in manufacturing. For the month, stocks, as represented by the S&P 500 Index, gained 2.3 percent bringing the index year-to-date return to positive 13.5 percent. Small-cap stocks led the major stock indices upward for the month with a gain of 3.3 percent, followed closely by mid-caps which advanced 3.2 percent.

For the longer 1- and 5- year periods, all of the major U.S. stock indices are in positive territory. For the 1-year period ending August 31, large-cap stocks led the major stock indices posting positive total returns of 18.0 percent followed by small-cap stocks and mid-cap stocks, which posted returns of 13.4 percent and 13.3 percent, respectively. Seven of the ten sectors within the S&P 500 posted positive returns for the month led by information technology and consumer discretionary which posted returns of 4.8 percent and 4.2 percent, respectively. Looking at the longer year-to-date time period, five sectors have recorded double-digit increases and all ten sectors are in positive territory.

Of interesting note is the contribution of Apple Incorporated to the information technology sector and overall performance of the S&P 500 Index. Without the contribution of the company, the S&P 500 Index year-to-date return of 13.5 percent would be reduced to 12.0 percent, and the information technology sector’s year-to-date gain of 19.2 percent would be 9.7 percent.

Let’s now turn our attention to the foreign equities markets.

Most of the global equities markets posted positive returns in August, although Japan and the most-stressed eurozone countries declined. The key economic issue for the month was “stimulus” after the European Central Bank committed to providing relief for the struggling European countries by buying up their bonds. For the month, the Morgan Stanley Capital International Europe, Australasia, and Far East Index of developed countries, posted a positive return of 2.7 percent.

Japanese stocks experienced a modest decline for the month down -0.4 percent, in U.S. dollar terms, as lack of overseas shipments to the European region continued to pull down exports. During the month, production at Japanese factories declined to their lowest levels in sixteen months and new vehicle sales dropped to a level not seen since August 2011.

Looking at the longer 1-year time period, Germany, United Kingdom and Sweden have posted positive returns of 8.1 percent, 6.7 percent and 5.6 percent, respectively. The eurozone’s second and third largest economies behind Germany, France and Italy, are in negative territory for the 1-year period declining -2.8 percent and -8.8 percent, respectively.

Let’s now switch our focus to the U.S. fixed income markets.

In the U.S. fixed income markets, bond prices posted a slight increase for the month as investors continued to demonstrate a “risk on risk off” behavior as the crisis in the eurozone showed signs of easing. For the month, the Barclays U.S. Aggregate Bond Index posted a positive 0.1 percent total return while high yield bonds, as represented by Barclays Corporate High-Yield Index advanced 1.2 percent. Over the longer 1-and 5-year time periods, government bonds, a represented by the Barclays Aggregate Bond Index has recorded positive returns of 5.8 percent and 6.7 percent, respectively.

U.S. municipal bonds ended the month mostly unchanged. For the month, the Barclays Municipal Bond Index advanced 0.1 percent and extended its year-to-date return to 5.4 percent. Over the longer 1- and 5-year time periods, municipal bonds have posted positive returns of 8.8 percent and 6.2 percent, respectively.

The U.S. Treasury yield curve steepened for the month with yields on intermediate and longer-term issues increasing more than shorter-term issues. The yield on the benchmark 10-Year Treasury Note finished the month at 1.57 percent while the 30-Year Treasury Bond yield closed the month at 2.68 percent.

With that, we will conclude this broadcast. Thank you again for listening to the State Farm Market Recap. Please join us again next month for the latest market review.

The results of the last FOMC meeting strongly suggest that the Fed will launch another round of bond buying or “quantitative easing” aimed at stimulating the economy. Should the Fed follow through with new easing measures how will the economy and financial markets respond?

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Securities through registered representatives of State Farm VP Management Corp., One State Farm Plaza, Bloomington, Illinois 61710-0001, 1-800-447-4930.

This recap has been prepared by State Farm VP Management Corp. for informational purposes. The information contained herein has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Any opinions discussed herein reflect our judgment as of the date of publication and are subject to change without notice. This material should not be considered a recommendation to purchase or sell any security.

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The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 31% of the total market capitalization of the Russell 1000 companies.

The Russell 2000® Index tracks the common stock performance of the 2,000 smallest U.S. companies in the Russell 3000® Index, which represents approximately 10% of the total capitalization of the Russell 3000® Index.

The S&P 500® Index tracks the common stock performance of large U.S. companies among various industries. In total, the S&P 500 is comprised of 500 common stocks.

The Barclays Capital Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market and is made up of investment grade municipal bonds issued after December 31, 1990, having a remaining maturity of at least one year.

The Barclays Capital High Yield Index includes all fixed income securities having a maximum quality rating from Moody's Investor Service of Ba1, a minimum amount outstanding of $100 million, and at least one year to maturity.

MSCI Emerging Markets Index – A capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors. The reported returns reflect equities priced in US dollars and do not include the effects of reinvested dividends. Consists of equities from emerging markets in Argentina, Brazil, Chile, China, Columbia, Czech Republic, Greece, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Portugal, Poland, South Africa, Sri Lanka, Taiwan, Turkey, Thailand, and Venezuela.