May 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 May 2012.

Equity markets tumbled for a second consecutive month in May as investors reacted to continuing turmoil in the Eurozone, and weak reports on the U.S. labor market and overall economic activity. For the month, stocks, as measured by the S&P 500 Index, posted a 6.0 percent loss marking their worst performing month since the 7.0 percent decline experienced last September.

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

In the U.S., stocks sold off during May as investors became increasing nervous about the uncertainty of the European financial crisis and signs of a slowing U.S. economy. Disappointing job numbers, here in the U.S., sent the markets lower for the month with the unemployment rate climbing to 8.2 percent, up from 8.1 percent in April. For the month, the S&P 500 Index fell 6.0 percent recording its eighth worst May in history and the worst since the 8.0 percent loss experienced in May of 2010. In May, mid-cap stocks as measured by the Russell MidCap Index, led all domestic equity markets lower for the month with a loss of 6.7 percent followed by small cap stocks, as measured by the Russell 2000 Index down 6.6 percent for the month.

Every sector within the S&P 500 was down during the month except for telecommunication services which avoided the trend and posted a 2.6 percent gain. Energy suffered the worst decline falling more than 10.0 percent amid rapidly falling oil prices which fell to USD $84 a barrel by month-end. Financials, materials and information technology also lost ground for the month falling 9.3 percent, 8.0 percent, and 7.9 percent, respectively. Year-to-date consumer discretionary, telecommunication services and financials lead the S&P 500 sectors in price return posting positive returns of 10.1 percent, 7.6 percent, and 7.4 percent, respectively. In May, Value stocks held up slightly better than Growth stocks for the month.

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

Global equity markets continued their downward direction in May with several countries within the Eurozone posting double-digit losses as investors remain concerned about the political, social, and economic turmoil within the region. The main concern was Greece, where preliminary elections were unsuccessful in a giving a single party the autonomy to form a coalition government. As a result, Greece led all of the developed countries lower for the month declining 30.3 percent followed by Portugal and Austria which lost 18.7 percent and 18.5 percent, respectively.

Japanese stocks also lost ground in May declining 8.9 percent in U.S. dollar terms, as China’s economic slowdown continued to weigh on the markets. During the month, credit rating agency Fitch downgraded Japan’s sovereign debt rating two levels from double A to A plus over concerns about the country’s high debt to GDP ratio.

The negative results the global markets experienced in May erased the positive gains recorded year-to-date with the MSCI EAFE Free Index posting a negative 3.8 percent total return for the period. Over the longer 1- and 5-year periods, the MSCI EAFE Free Index has posted negative returns of 20.5 percent, and 7.3 percent, respectively.

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

In the U.S. fixed income markets, U.S. Treasuries rallied taking yields back to historic lows as deteriorating sovereign-debt conditions in Europe sent investors fleeing towards the relative safety of U.S. government bonds. For the month, the Barclays U.S. Aggregate Bond Index ended the month with a modest 0.9 percent total return. Over the longer 1- and 5-year time periods, long-term government bonds have posted positive total returns of 7.1 percent and 6.7 percent, respectively.

High-yield bonds sold off during the month as cautious investors stayed away from taking on risk. As a result, the Barclays High-Yield Index, ended the month down 1.3 percent.

Municipal bonds edged out a modest gain in May with the Barclays Municipal Bond Index advancing 0.8 percent for the month. Over the longer 1- and 5-year periods, municipal bonds have posted positive returns of 10.4 percent, and 5.9 percent, respectively.

Interest rates declined to near record lows during the month as investors seeking shelter from the faltering financial system in Europe, sought out the relative safety of U.S. Treasuries. As a result, the yield on the benchmark 10-Year Treasury Note ended the month at 1.59 percent a level not seen since December 2008. The 30-Year Treasury Bond yield also moved towards record lows ending the month at 2.67 percent, down from April’s month-ending 3.12 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 U.S. economy has demonstrated strong resilience despite deteriorating economic conditions in several regions around the globe. But with continued U.S. growth threatening to fall short of what is needed to reduce unemployment and move the economy forward are we close to the point where the Fed needs to take action by adding more monetary stimulus?

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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.