August State Farm® Market Recap

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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 month’s recap for August 2009 reflects on the continuous global equity market rebound that began in March amid improving economic and benign inflation data. In the bond markets, corporate, high-yield, and U.S. Treasury bond prices all advanced causing yields to retreat. Commodity prices saw an overall rise, while crude oil prices hovered in a relatively close range between $65 and $75 per barrel.

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

U.S. stocks continued to climb during August with nine out of the ten sectors within the S&P 500 Index posting positive returns for the month.  Major equity indexes, including the Dow Jones Industrial Average, S&P 500, and the Nasdaq Composite finished the month at or near their highest levels of the year.

Economic data continued to reveal positive surprises on the whole.  The initial estimate of GDP for the 2nd quarter was confirmed at -1%, whereas economists were expecting a downgrade.  In addition, stocks received a boost as U.S. home prices rose in the second quarter for the first time in three years, according to the S&P/Case-Shiller Home-Price Indices. Also, consumer confidence increased during the month and the Federal Reserve gave notice that short-term interest rates would remain at historically low levels for an extended period.     

In the end, U.S. stock prices climbed in August as investors reacted to the positive economic data released during the month.  Mid-cap stocks, as represented by the Russell Midcap Index, led all domestic equity markets higher during August with a gain of 4.9%.  Large cap stocks (as represented by the S&P 500 Index) and small- cap stocks (as represented by the Russell 2000 Index) also produced solid gains of 3.6% and 2.9% for the month, respectively.  Over the longer five-year timeframe, the S&P 500 Index climbed into positive territory during the month while the Russell Midcap® Index and the Russell 2000® Index have posted positive average annual returns of 3.4% and 2.2%, respectively.  Value stocks outperformed growth stocks across all market capitalizations for the month. 

From an industry sector perspective, the Financials sector outperformed all others climbing over 12.8% in August.  Large banks such as Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo were the top four contributors to the S&P 500's advance.  Shares of American International Group or AIG, now largely owned by the U.S. government, more than tripled during the month as the company reported a tenuous profit, benefitting from a change in how firms can account for troubled assets.  The only other sector to outperform the broader index was Industrials with a gain of 4.1% for the month.

Telecommunications Services was the only sector to post a negative return for the month, declining 2.4%.  Within this sector, wireless businesses including Sprint Nextel and Qwest performed the worst as the business came under increased regulatory scrutiny.  Energy stocks were mostly flat as crude oil prices continued to trade in a range of $65 - $75 per barrel during the month.

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

European equity markets also posted gains amid signs of economic growth and tame inflation data. The MSCI Europe Index was up 6.3% in U.S. dollar terms for August as all countries within the index posting positive returns for the month.  Among European markets, Austria gained the most during the month, climbing nearly 12.5%.  Belgium was also strong, ending the month up over 10.3%.  Norway was the weakest European equity market, but still posted a gain of 2.7% for the month.  Over the longer five-year timeframe, European equities have produced positive average annual returns of 6.8%.  From a currency perspective, the euro gained more than 1% against the U.S. dollar while the British pound sterling weakened by nearly 2% for the month. 

Japanese stocks reacted to improving economic data and political leadership change with another month of gains, rising 3.9% in U.S dollar terms.  Showing signs of economic recovery, Japan's GDP grew 0.9% in the second quarter as compared to the previous quarter - the first quarter-over-quarter increase since early 2008.

Over the longer five-year timeframe, Japanese equities remained in positive territory during August, with an average annual return of 2.2%.  The Japanese yen gained 1.8% against the U.S. dollar during the month.  

Among emerging market countries, China declined 7% during the month over investor’s doubts that the country could maintain its high economic growth rate while gradually withdrawing the fiscal and monetary stimulus going forward.  Given the decline in China, the MSCI Emerging Market Index declined 0.4% for the month.  However, despite the decline in August, emerging market stocks are up nearly 51% on a year-to-date basis.  

Switching our focus to the U.S. fixed income markets, bonds gained ground as inflation remained subdued despite improving economic data.  Corporate bonds continued to perform well in response to stabilization of the economy and positive news in the financial sector.  U.S. Treasuries gained ground causing yields to fall slightly across the yield curve. Municipal bonds posted a gain for the month due to increased confidence among investors.

For the month, yields decreased across the U.S Treasury yield curve with yields on long-term bonds losing more ground than shorter-term issues.  Benchmark short-term Treasury interest rates still remained anchored by the Fed’s near-zero interest rate policy. 

Among major U.S. fixed income indices, the Barclays Capital U.S. Aggregate Bond Index gained over 1.0% for August.  High-yield bonds also posted solid gains with the Barclays Capital High Yield Index climbing 1.9% during the month.  Year to date, high-yield bonds have gained almost 41%.  Municipal bonds also increased in August with the Barclays Capital Municipal Bond Index gaining 1.7%, bringing its year to date return to over 10%.  Over the longer one- and five-year timeframes, municipal bonds have produced positive total returns of 5.7% and 4.2%, respectively.

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.    Will the global equities markets be able to sustain the rally brought on by more upbeat economic data and lessened concerns of inflation, or will it be discovered that investors have become overly optimistic regarding the perceived recovery of the global economy?   

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.

State Farm Mutual Funds are available through prospectus by State Farm VP Management Corp., One State Farm Plaza, Bloomington, Illinois 61710, 1-800-447-4930. Please read the Prospectus and consider the investment objectives, risks, charges and expenses and other information it contains about State Farm Mutual Funds carefully before investing. AP2009/09/3255.

Past performance is no guarantee of future results. 

It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.  Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Diversification does not ensure a profit or protect against losses in a declining market.

It is not possible to invest directly in an index.

Securities, insurance and annuity products are not FDIC insured, are not guaranteed by State Farm Bank and are subject to investment risk, including possible loss of principal.

The stocks of small companies are more volatile than the stocks of larger, more established companies.

Investments in bonds are subject to interest rate, credit and inflation risk, including those issued by the U.S. Government.   There is risk that the bonds a fund holds may decline in value due to an increase in interest rates.

Investing in foreign securities involves risks not normally associated with investing in the U.S. including higher trading and custody costs, less stringent accounting, legal and reporting practices, potential for political and economic instability, and the fluctuation and potential regulation of currency exchange and exchange rates.

Investing in emerging markets involves risks not normally associated with investing in developed countries including, but not limited to, greater market volatility, lower trading volume, political and economic instability, greater risk of market shut down and more governmental limitations on foreign investment policy than those typically found in a developed country.

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 Dow Jones Industrial Average is an unmanaged average of 30 actively traded stocks (primarily industrial) and assumes reinvestment of dividends.
The NASDAQ Composite is an unmanaged market capitalization weighted index that is designed to represent the performance of the National Market System, which includes over 5,000 stocks traded only over-the-counter and not on an exchange. Its return is based on price change only and does not include income.

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 Morgan Stanley Capital International Europe Index, a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. The MSCI Europe Index consists of the following 14 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom.

The Barclays Capital 1-5 Year U.S. Treasury Index measures the performance of short-term U.S. Treasury Securities maturing within one to five years. Returns of the Barclays Capital 1-5 Year U.S. Treasury Index do not reflect any deductions for taxes.

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 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.

The Nikkei 225 Index is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange.

The Credit Suisse High Yield Index is designed to mirror the investible universe of the $U.S.-denominated high yield debt market.