July 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 July 2012.

Both domestic and international equity markets advanced modestly higher in July as investors closely monitored U.S. economic reports and several events surrounding the on-going debt and recession problems in Europe.

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

In the U.S., stocks made modest advancements in July despite weathering a month of volatility. During the month, the S&P 500 Index moved more than 2 percent up and down to finally close-out the month with a 1.4 percent gain. Mid-cap stocks also posted gains in July with the Russell Mid-cap Index advancing 0.2 percent for the month. Small-cap stocks suffered from data reports pointing towards a weakening economy, and ended the month in negative territory dropping -1.4 percent. Year-to-date stocks, as measured by the S&P 500 Index, have posted double-digit positive returns of 11.0 percent.

For the longer 1- and 5- year periods, all of the major stock indices have climbed into positive territory. For the 1-year period, large-cap stocks led the major stock indices positive total returns of 9.1 percent followed by mid-cap stocks and small-cap stocks, which posted returns of 2.3 percent and 0.2 percent, respectively.

The more defensive, higher yielding sectors within the S&P 500 sectors posted positive results for the month led by telecommunication services, consumer staples and utilities, which posted positive returns of 5.5 percent, 2.6 percent, and 2.5 percent, respectively. Energy stocks, which have lagged the other sectors year-to-date, rallied for a second straight month up 4.1 percent, helped by higher prices for crude oil and natural gas. The more economic sensitive sectors, materials and consumer discretionary, experienced negative returns for the month declining -1.3 percent and -0.3 percent, respectively.

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

Global equity markets posted modest gains for the month despite economic turmoil in Spain, Italy, Greece, and other financially troubled nations. As Europe's mounting debt problems and weakening economy continued to dominate the headlines, the European Central Bank reduced its benchmark interest rates by 25 basis points, cutting the central bank's refinance rate to a record low of 0.75 percent and the overnight deposit rate to zero. For the month, the Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE) Free Index of develop countries posted a positive 1.1 percent total return. Emerging markets, as represented by the Morgan Stanley Emerging Markets Index, advanced 2.0 percent for the month.

Japanese stocks declined -2.4 percent in July as the country continues to deal with a rising yen and sluggish global economies. Japan, the third-largest economy in the world, relies heavily on exports for its economic growth and the economic slowdown in Europe, China, and other emerging countries has weighed heavily on the demand for Japanese goods. As a result, Japan posted a record trade deficit for the first six months of the year.

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

U.S. fixed income markets produced positive results in July as investors continued to favor the relative safe-haven of government securities amid global economic uncertainty. As a result, the Barclays U.S. Aggregate Bond Index ended the month with a positive 1.4 percent total return. Riskier high-yield bonds also advanced for the month as several U.S. companies took advantage of low interest rates by issuing new debt. IBM, one of the world's largest technology and consulting companies, sold $1 billion of 10-year notes at a coupon rate of 1.87 percent, the lowest on record for that maturity and the first time in history a 10-year corporate bond had been issued below 2 percent. For the month, the Barclays Corporate High-Yield Index posted a positive 1.9 percent total return.

Despite some high-profile municipalities filing for bankruptcy in California, U.S. municipal bonds ended the month in positive territory. For the month, the Barclays Municipal Bond Index advanced 1.6 percent and extended its year-to-date return to 5.3 percent. Over the longer 1- and 5-year time periods, municipal bonds have posted positive returns of 10.5 percent and 6.1 percent, respectively.

Prices rose and yields dropped on U.S. Treasuries as investors reacted to renewed worries about the European credit crisis. The yield on the benchmark 10-Year Treasury Note touched a historic low of 1.43 percent on July 25th and finished the month at 1.51 percent. The 30-Year Treasury Bond yield, which also touched a low point on the 25th closed the month down 20 basis points from month ending June at 2.56 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.

A weak economy, high unemployment, and growing national debt are quickly becoming key issues for the Presidential candidates as they campaign towards the 2012 Presidential election. How will the financial markets react once the nation's 45th President has been elected?

---

Securities Issued by State Farm VP Management Corp. For more information, call 1-800-447-4930

This recap has been prepared by State Farm VP Management Corp. for informational purposes and should not be considered a recommendation to buy or sell any security. Any opinions discussed herein reflect our judgment as of the date of publication and are subject to change.

---

The Morgan Stanley Capital International Europe, Australasia and Far East Free (EAFE® Free) Index currently measures the performance of stock markets of Europe, Australia, New Zealand, and the Far East.

The Russell Midcap Index measures the performance of the mid-cap segment of the US equity market and is a subset of the Russell 1000 Index.

The S&P 500® Index tracks the common stock performance of 500 large U.S. companies.

The Barclays Capital U.S. Aggregate Bond Index represents debt securities in the U.S. investment grade fixed rate bond market, including government and corporate debt securities, mortgage pass-through debt securities and asset-backed debt securities with maturities greater than one year.

The Barclays Capital Municipal Bond Index is an unmanaged index representative of the tax-exempt bond market.

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.

The MSCI Emerging Markets Index is a capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors.