December State Farm® Market Recap

Back to Market 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 month’s recap for December 2008 reflects on the gains achieved in the global equities and bond markets and the actions taken by several major central banks around the world in easing monetary policy in an attempt to help stabilize global financial markets. Despite the gains in the equities and bond markets, commodity prices continued to decline, crude oil remained under $50 per barrel, and housing prices remained under pressure.    

Let’s begin with a recap of the U.S. equities markets.

Closing out a volatile and dismal year for equities, U.S. stocks rose during December, posting their first monthly gains since August. The positive returns were driven by a mixture of aggressive monetary easing by the Federal Reserve, plans for increased governmental stimulus spending, and a thaw in the frozen credit markets.   

In December, the Federal Reserve lowered the federal funds target rate from 1.00% to a historic low range of 0.00% to 0.25% in an unprecedented move to shore up a weakening U.S. economy. In addition, the Fed announced that it was prepared to take additional steps to help revive the economy by purchasing agency, mortgage-backed, and Treasury securities.    

Investors were also optimistic that the incoming Obama administration would move quickly to enact a new stimulus package aimed at creating or saving three million jobs over two years at an estimated cost of $775 billion.  In addition, the market was supported by notable improvements in the credit markets and President Bush’s decision to allow distressed automakers access to governmental rescue funding. 
However, not all news was positive during the month as fresh economic data continued to paint a gloomy picture and it was officially confirmed by the National Bureau of Economic Research that the U.S. economy has been in a recession since the beginning of 2008.  In addition, housing prices continued to decline and the unemployment rate for November climbed to 6.7%, exceeding the highest level from the 2001 recession.      

Despite this negative data, investors focused on the positive and helped to drive stock prices higher.  For the month, the small cap Russell 2000® Index and Russell Midcap® Index stocks led the domestic equity markets higher gaining 5.8% and 4.3%, respectively. Large cap stocks, as represented by the S&P 500 Index, lagged their smaller peers, but also ended the month with a modest gain of over 1.0%. Value stocks outperformed growth stocks among small and mid-cap shares, while the reverse was true among large-cap stocks.        

Despite the modest rebound in December, all major U.S. equity indexes closed out 2008 in deep negative territory. For the year, mid cap stocks declined the most with the Russell Midcap Index falling -41.5% while the large cap S&P 500 Index and the small cap Russell 2000 Index declined -37.0% and -33.8%, respectively. In addition, driven by the magnitude of the losses this past year, each of the major U.S. equity market indexes remained in negative territory over the longer five-year timeframe as well.  

From an industry sector perspective, Health Care and Consumer Discretionary stocks performed well in December, while Energy and Utilities fell moderately. Most remaining sectors were flat.
Six of the ten largest contributors to the S&P 500’s gain during the month were health care companies as investors speculated that the ongoing financial crisis would take priority over health care reform measures in Washington. In addition, Pfizer gained ground upon news of positive drug trial results, cost cutting initiatives, and efforts in developing new drugs. For the month, the Health Care sector gained over 6.6%. Consumer Discretionary stocks also climbed over 5.0% while Technology stocks gained over 1.6%, supported by better-than-expected earnings from Oracle. 

Energy stocks were weak during December, declining over -4.0% as crude oil prices remained below $50 a barrel. Utilities stocks also declined, sliding nearly 2.5% for the month.

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

Despite worsening worldwide economic news and further gloomy forecasts, Europe's equities rebounded somewhat in December, posting a positive monthly return for the first time since August.  Spain, Germany and Belgium were Europe’s strongest performers for the month each posting double-digit gains, while Ireland and the United Kingdom were the weakest posting relatively small losses. The British pound sterling fell to a six-and-a-half-year low against the U.S. dollar, sinking -6% for the month while the euro climbed 10% relative to the U.S. dollar. For the month, the MSCI Europe Index gained 5.3%, but ended the year in negative territory with a loss of -46.4% in U.S. dollar terms. Over the longer five-year timeframe, European equities have produced returns higher than those obtained in the U.S., gaining over 1.5% annualized.

Japanese stocks gained over 8.1% during the month in U.S dollar terms, outperforming other Asian and Pacific equity markets. The Bank of Japan cut interest rates by another 20 basis points, bringing their benchmark rate to 0.1% as data continued to show that the recession in Japan is worsening. The Japanese yen continued to increase against the U.S. dollar during the month; benefiting U.S. investors in Japanese stocks while hurting Japanese exporters. For the year, Japanese stocks have lost over -29.1% in U.S. dollar terms. Japan’s five-year returns have remained in positive territory gaining an average of 1.0%, but have lagged most other developed countries over this timeframe.

In the U.S. fixed income markets, most segments gained ground in December as long-term Treasury prices increased as yields reached new lows. In addition, some stability returned to the credit markets. Long-term Treasury bond prices increased dramatically with 30-year yields dropping down to nearly 2.7%, which is a multi-decade low. Other government issues and investment-grade corporate bonds also fared well, but asset-backed securities recorded losses on worries over how credit card and auto loans would perform in a worsening economy.  

With prices on U.S. Treasuries increasing, yields fell across the maturity spectrum with yields on very short-term Treasuries continuing to hover just above 0%. Intermediate and longer-term Treasury yields fell more sharply causing the yield curve to flatten somewhat during the month. Among major U.S. fixed income indexes, the Barclays Capital U.S. Aggregate Bond Index gained over 3.7% for the month and closed the year with a gain of over 5.2%. On a three-year and five-year basis, bonds have generated a total return of over 5.5% and 4.6%, respectively, highlighting the positive effect bonds can have in an investors asset allocation mix over longer periods of time.  In a notable turnaround, high-yield bonds posted sizable gains during the month with the Barclays Capital High Yield Index climbing nearly 7.7%.  Despite the strong 1-month performance, high-yield bonds closed 2008 with significant losses of over -26.1%. Municipal bonds ended the month in positive territory with the Barclays Capital Municipal Bond Index gaining nearly 1.5%, but closed the year in negative territory with a loss of -2.5%. Over the longer five-year timeframe, municipal bonds have generated a positive total return of 2.7%.

With that, we will conclude this broadcast. Thank you for listening to the State Farm Market Recap.  Please join us again next month for the latest market review. Will the financial markets continue to rebound as governments and central banks around the world work together to increase liquidity in the credit markets and revive languishing economies? Or will investor confidence be shaken by additional negative forecasts?

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.

AP2009/01/2024

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.

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. 

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.

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

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.

"S&P 500®" is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by the State Farm Mutual Fund Trust. The State Farm S&P 500 Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by Standard & Poor's makes no representation regarding the advisability of investing in the Fund.   

The Russell 2000® Index is a trademark/service mark, and RussellTM is a trademark of the Frank Russell Company. The State Farm Small Cap Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by, nor in any way affiliated with the Frank Russell Company.  Frank Russell Company is not responsible for and has not reviewed the Fund nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.

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.