October 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 October 2012.

Equity markets reversed course in October as political uncertainty, the looming “fiscal cliff”, and disappointing third-quarter earnings reports took their toll on the markets and ended a four-month rally of positive gains.

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

In the U.S., stocks pulled back in October as investor worries over the slowing pace of global growth coupled with soft third-quarter earnings reports help send the markets lower for the month. Late in the month, hurricane Sandy battered the East Coast causing the financial markets to close for two consecutive days, the first weather-related shutdown to occur on consecutive days in more than a century. At month end, small-cap stocks, as measured by the Russell 2000 Index, led all domestic equities lower falling -2.2 percent, followed by large-cap stocks and mid-caps stocks which dropped -1.9 percent, and -1.0 percent, respectfully. Despite the October sell-off, U.S. equities remain significantly higher for the year. Year-to-date through October, the S&P 500 Index® has returned 14.3 percent followed by the Russell Mid-Cap Index® and the Russell Small-Cap Index® which have posted total returns of 12.9 percent and 11.8 percent, respectively.

For the longer 5-year time period, stocks remain in positive territory led by mid-cap stocks posting positive total returns of 1.7 percent, followed by small-cap stocks and large-cap stocks which have returned 1.2 percent and 1.1 percent, respectively.

Among the various sectors within the S&P 500, financials, utilities and health care were the only advancing sectors for the month posting returns of 1.2 percent, 0.5 percent, and 0.3 percent, respectively. Information technology stocks led the declining sectors lower for the month falling -6.3 percent as several large bellwether companies reported weaker-than-expected third-quarter earnings. Telecommunication services declined -5.1 percent as merger activity amongst some of the wireless providers caused the shares of larger rivals to retreat.

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

Global equity markets posted mixed results in October with several European markets experiencing moderate gains while emerging markets ended in negative territory. For the month, the Morgan Stanley Capital International Europe, Australasia, and Far East Index of developed countries gained 0.8 percent while the Morgan Stanley Capital International Emerging Markets Index, lost -0.6 percent. The modest increase with European stocks were mainly driven by positive economic reports and progress made in resolving the European debt crisis. Emerging markets retreated for the month, following an 8% gain in the third quarter.

Japanese also stocks lost ground in October falling -1.9 percent in U.S. dollar terms, as the country continues to combat a slowing economy. During the month, the Bank of Japan (BOJ) boosted its monetary stimulus for a second month in a row in an effort to keep the world’s 3rd largest economy from falling into recession. It was the first time since 2003 that the BOJ has eased policy two months in a row.

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

The U.S. core fixed income markets went mostly unchanged in October as the Barclays U.S. Aggregate Bond Index posted a monthly return of 0.2 percent. Corporate bonds fared better in response to growing optimism over the slow but gradual expansion of the U.S. economy with the Barclays Corporate High-Yield Index advancing 0.9 percent. Over the longer 1-and 5-year time periods, bonds, as measured by the Barclays Aggregate Bond Index, has posted positive returns of 5.3 percent and 6.4 percent, respectively.

The U.S. municipal bond market posted a slight increase for the month as the Barclays Municipal Bond Index advanced 0.3 percent and extended its year-to-date return to 6.4 percent. Over the longer 1- and 5-year time periods, municipal bonds have posted positive returns of 9.0 percent and 6.0 percent, respectively.

U.S. Treasury bonds dropped as signs of a gradually improving U.S. economy reduced investor interest for the relative safe-haven assets. For the month, the yield on the benchmark 10-Year Treasury note closed at 1.72 percent while the 30-Year Treasury Bond yield ended the month at 2.85 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.

Now that the Presidential election has been decided, the U.S. Congress has turned their attention to the difficult task of resolving the issues creating the so called “fiscal cliff”. With political decisions pending, will the stock market be bullish or bearish for the remainder of 2012?

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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 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.

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