February 2009 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 February 2009 reflects on yet another month of steep losses in the global equities markets amid deepening problems in the financials sector, disappointment regarding the U.S. fiscal stimulus package, and more downbeat economic data. Meanwhile, bonds posted overall losses while commodity prices were mixed, with crude oil ending the month near $45 per barrel.      

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

U.S. stocks sank to levels not seen since 1997 as fresh economic data painted a grim picture of a deepening recession and banks continued to struggle to remain afloat. President Obama’s stimulus package, bank rescue plan and budget proposal did little to slow the downward momentum.

During February, Congress passed a $787 billion stimulus package aimed at providing relief to consumers, businesses and states, while creating jobs through spending on infrastructure projects such as roads and public transportation projects. In addition, the President announced he was budgeting for a new $750 billion bank bailout in 2009, increasing the potential stake that taxpayer’s would have in the troubled financial sector.  

Economic data remained dismal as a revised GDP report showed the economy had shrank at an annualized rate of 6.2% in the fourth quarter of 2008. This was a level of contraction that was steeper than the 3.8% annualized decline that was originally reported.   In addition, unemployment climbed to 7.6%. Durable goods and industrial production tumbled, and new home sales plunged to the lowest level since the survey began in 1963.

In the end, all of the negative news took its toll and U.S. stocks sold off for a second straight month. The small cap Russell 2000® Index fared the worst, losing -12.2% during February. The Russell Midcap® Index and large cap S&P 500 Index held up somewhat better, but still posted significant monthly losses of -10.0% and -10.7%, respectively. Growth stocks held up better than Value stocks across all market capitalizations for the month. 

Over the one-year timeframe, mid cap stocks have declined the most with the Russell Midcap Index falling -46.6% while the large cap S&P 500 Index and the small cap Russell 2000 Index have declined -43.3% and -42.4%, respectively. Each of the major U.S. equity market indexes remained in negative territory over the longer five-year timeframe as well, driven by the magnitude of the losses over the past 12 months.  

From an industry sector perspective, Financials stocks continued to get hammered during the month, plunging -18.4% as Citigroup and American International Group (AIG) tumbled on mounting expected losses and additional reliance on government assistance to prevent collapse. Stocks in the Industrials, Health Care, Energy, and Utilities sectors also declined more than the overall market average for the month.

Stocks within the Telecommunication Services and Information Technology sectors held up better than all others, declining -2.8% and -4.3%, respectively for the month. Stocks in the Consumer Staples, Consumer Discretionary, and Materials sectors also declined less than the overall market average for the month. 

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

All European equities markets posted losses during February amid the continuing global economic downturn.  Greece, Finland, and Austria were among Europe’s weakest performers, each posting losses exceeding 17%. The United Kingdom posted an -8.2% loss for the month. Among European markets, Sweden held up the best, losing -3.5%. The euro and the British pound sterling each fell marginally against the U.S. dollar during the month. For February, the MSCI Europe Index fell -10.1% and has lost -52.6% in U.S. dollar terms over the one year timeframe. Over the longer five-year timeframe, European equities have produced negative average annual returns of -3.2%. 

Japanese stocks also lost ground in February sinking -12.4% during the month in U.S dollar terms. Japan's economy shrank 3.3% in the fourth quarter of 2008 - its largest contraction in 35 years as exports declined -46% over the prior year and domestic spending weakened.  The Japanese yen weakened 8% against the U.S. dollar during the month.  Over the one year timeframe, Japanese stocks have lost nearly -40% in U.S. dollar terms.  Japanese equities have also produced negative average annual returns over the longer five-year timeframe of -3.3%.

In the U.S. fixed income markets, long-term U.S. Treasuries lost ground in February as Treasury prices increased in response to investor worries about the amount of new debt needed to finance the ongoing financial bailout and the new $787 billion stimulus package. Meanwhile, credit-sensitive sectors, such as corporate bonds, moved lower as well.
Long-term Treasury bond prices fell as 30-year yields climbed to 4.6% from 3.6% the month before. High-yield and asset-backed securities were particularly weak during the month. 

The U.S. Treasury yield curve steepened somewhat during the month as longer-term yields increased to a greater extent relative to shorter-term yields.  Yields on 1-month and 3-month Treasuries remained at historic low levels of below 0.3%.

Among major U.S. fixed income indexes, the Barclays Capital U.S. Aggregate Bond Index dropped -0.4% for the month.  However, over the one-year timeframe, the Index has gained 2.1%. On a three-year and five-year basis, bonds have generated a total return of over 5.0% and 4.0%, respectively, highlighting the positive effect bonds can have in an investors asset allocation mix over longer periods of time. Reversing a two month positive trend, high-yield bonds performed poorly with the Barclays Capital High Yield Corporate Bond Index falling nearly -5.5%. High-yield bonds have lost over -22% over the one year timeframe and are slightly negative over the longer five-year timeframe. Municipal bonds provided positive returns in February as investors continued to be attracted to their high tax-free yields relative to Treasuries.  For the month, the Barclays Capital Municipal Bond Index managed a small gain of 0.5% and climbed into positive territory with a gain of 5.2% over the one-year timeframe. Over the longer five-year timeframe, municipal bonds have generated a positive total return of 3.1%.

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. As the debate over taxpayer bailouts for the financial sector and the auto industry intensifies, what impact will this have on the financial markets?

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.

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