September 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 September 2012.

Equity markets continued their upward momentum in September marking the fourth month of consecutive gains and closing out a solid third quarter performance. For the quarter, the S&P 500 Index® gained 6.4 percent advancing the index year-to-date return to a positive 16.4 percent.

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

In the U.S., stocks continued to rally in September amongst the back drop of weakening global economic activity. The S&P 500 Index gained 2.6 percent for the month, driven largely by the latest bond-buying programs by the U.S. Federal Reserve and the European Central Bank, as well as additional stimulus by the Bank of Japan. At month end, small-cap stocks, as measured by the Russell 2000 Index, led all domestic equities higher gaining 3.3 percent. Mid-cap stocks, as measured by the Russell Mid-cap Index, also ended the month in positive territory advancing 2.1 percent.

Among the various sectors within the S&P 500, telecommunications services gained 3.9 percent as large carriers rolled out new wireless pricing amid the release of Apple Incorporated’s iPhone 5. Consumer discretionary, energy, health care, and materials were also particularly strong, posting monthly returns in excess of 3 percent. Utilities lagged for the month with gains slightly below 1 percent.

Year-to-date each of the major U.S. stock indices are in double-digits led by large-cap stocks returning 16.4 percent, followed by small-cap stocks and mid-cap stocks which have returned 14.2 percent and 14.0 percent, respectively.

For the longer 1-year time period, small-cap stocks led the major stock indices posting positive total returns of 31.9 percent, followed by large-cap stocks and mid-cap stocks which have returned 30.2 percent and 28.0 percent, respectively.

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

Global equities markets advanced in September as the European Central Bank (ECB) moved aggressively to address the regions challenging financial crisis. During the month, the ECB approved a plan to buy unlimited amounts of sovereign debt from struggling euro-zone nations aimed at lowering borrowing costs and boosting the economy. For the month, the Morgan Stanley Capital International Europe, Australasia, and Far East Index of developed countries, posted a positive return of 3.0 percent. Emerging markets, as measured by the Morgan Stanley Capital International Emerging Markets Index, also advanced gaining 6.0 percent.

Japanese stocks ended the month slightly higher gaining 2.3 percent, in U.S. dollar terms, as the Bank of Japan announced a new round of stimulus by expanding its asset-purchase program by another 10 trillion Japanese Yen. Japans industrial production and overall economy has been struggling most of the year as a strengthening yen and slowing economic conditions in China and Europe have weighed heavily on the demand for the country’s exports.

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

In the U.S., fixed income markets went mostly unchanged in September while the riskier high-yield debt instruments posted a modest gain. For the month, the Barclays U.S. Aggregate Bond Index returned 0.1 percent while high yield bonds, as represented by Barclays Corporate High-Yield Index, advanced 1.4 percent. Over the longer 1-and 5-year time periods, bonds, as represented by the Barclays Aggregate Bond Index have recorded positive returns of 5.2 percent and 6.5 percent, respectively.

The U.S. municipal bond market experienced a slight increase for the month as the Barclays Municipal Bond Index advanced 0.6 percent and extended its year-to-date return to 6.1 percent. Over the longer 1- and 5-year time periods, municipal bonds have posted positive returns of 8.3 percent and 6.1 percent, respectively.

U.S. Treasury bonds were essentially flat for the month as monetary easing by central banks reduced investor appeal for the relative safe-haven assets. For the month, the yield on the benchmark 10-Year Treasury Note closed at 1.65 percent while the 30-Year Treasury Bond yield ended the month at 2.82 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.

U.S. stocks face three major challenges as we look ahead to 2013; the sovereign debt crisis in Europe, slowing economic growth in China, and the threat of a so-called “fiscal cliff” in the U.S. after the November elections. Can stocks maintain their momentum in the coming months, or will the U.S. economy and financial markets be disrupted by macroeconomic events?

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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.