January 2009 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 January 2009 reflects on the steep losses in the global equities markets amid lingering worldwide economic weakness, continuing credit market problems, and increasing corporate layoffs. Meanwhile, bonds posted modest overall losses while commodity prices were mixed, with crude oil ending the month above $40 per barrel.

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

Despite hopes that a new year would provide a fresh start for stocks; continuing economic weakness, dismal fourth-quarter earnings reports and news of massive layoffs at several major companies drove U.S. equities lower during January. By the end of December 2008, the unemployment rate had climbed to 7.2%. The number of people receiving unemployment benefits hit an all-time high as tens of thousands of additional workers found themselves without a job during January with Caterpillar, Pfizer, Alcoa, General Electric and Boeing slashing jobs. Retailer Circuit City alone laid off more than 30,000 employees as it was forced to liquidate its assets.        

The downward pressure on the equities market only grew as anxious investors looked on while the Senate debated President Obama’s $825 billion fiscal stimulus plan that was passed by the House of Representatives. The plan contained significant spending measures for infrastructure projects, extensions to jobless benefits and Medicaid, as well as a tax relief package.   

In January, the Federal Reserve left the federal funds target rate at a historic low range of 0.00% to 0.25% and announced its intentions to purchase Treasuries if it would help improve credit conditions. 

Economic data remained gloomy as it was reported that the economy shrank at an annualized rate of 3.8% in the fourth quarter of 2008. Consumer confidence, sales of durable goods, and new home sales also sank during the month. On a positive note, sales of existing homes rose unexpectedly. However, home values continued to decline.

In the end, all of the negative news took its toll and U.S. stocks sold off hard during the month. The small cap Russell 2000® Index fared the worst, losing -11.1% during January.  The Russell Midcap® Index and large cap S&P 500 Index held up somewhat  better, but still posted significant monthly losses of -7.4% and -8.4%, respectively. Growth stocks held up significantly 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 -42.0% while the large cap S&P 500 Index and the small cap Russell 2000 Index have declined -38.6% and -36.8%, respectively.  In addition, driven by the magnitude of the losses the past twelve months, 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, Financials was by far the weakest, plunging a jaw-dropping -26.6% for the month as credit markets remained weak and corporate earnings and forecasts continued to be dismal. Stocks in the Industrials, Telecommunications, and Consumer Discretionary sectors also declined more than the overall market average.     

The Information Technology sector held up better than most others, supported by better than expected earnings from Google and IBM. Among other sectors, Utilities fell the least, followed by Health Care, which was supported by Pfizer’s $68 billion offer for Wyeth and positive earnings from Baxter International.

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

Given worsening worldwide economic news and further gloomy forecasts, Europe's equities lost ground in January, with most European markets posting double-digit losses for the month. Germany, Spain and France were among Europe’s weakest performers for the month each posting losses exceeding 14%. Only Norway posted a gain during the month of 2.5%. The euro fell 8% against the U.S. dollar during January, while the British pound sterling remained flat. For the month, the MSCI Europe Index plunged -11.0% and has lost – 46.5% in U.S. dollar terms over the one-year timeframe. Over the longer five-year timeframe, European equities have also produced negative average annual returns of -0.6%.

Japanese stocks also lost ground dropping -6.8% during the month in U.S dollar terms. The Bank of Japan kept their benchmark rate at 0.1% as data continued to show that the recession in Japan is deepening and as their unemployment rose to 4.4% in December. The Japanese yen rose slightly against the U.S. dollar during the month, benefiting U.S. investors in Japanese stocks while continuing to hurt Japanese exporters. Over the one year timeframe, Japanese stocks have lost over -30.8% in U.S. dollar terms. Japan’s five-year returns turned negative in January losing an annualized average of -0.7%.

In the U.S. fixed income markets, U.S. Treasuries slightly lost ground in January due largely to a rise in longer-term Treasury yields. Meanwhile, credit-sensitive sectors, such as corporate bonds, posted good gains.

Long-term Treasury bond prices fell modestly with 30-year yields climbing to 3.6% from 2.7% the month before. High-yield and asset-backed securities were particularly strong during the month. 

The U.S. Treasury yield curve steepened 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 0.25%.

Among major U.S. fixed income indexes, the Barclays Capital U.S. Aggregate Bond Index dropped -0.9% for the month. However, over the one-year timeframe, the Index has gained 2.6%. On a three-year and five-year basis, bonds have generated a total return of over 5.2% and 4.3%, respectively, highlighting the positive effect bonds can have in an investors asset allocation mix over longer periods of time. For the second straight month, high-yield bonds posted sizable gains with the Barclays Capital High Yield Index climbing nearly 6.0%.  Despite these recent strong returns, high-yield bonds have lost over -20.7% over the one year timeframe and are nearly flat over the longer five-year timeframe. Municipal bonds performed well in January as investors were attracted to their high tax-free yields relative to Treasuries.  For the month, the Barclays Capital Municipal Bond Index gained nearly 3.7%, but remained in negative territory with a loss of -0.2% over the one-year timeframe. Over the longer five-year timeframe, municipal bonds have generated a positive total return of 3.3%.

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. What impact will the passage of the new stimulus package begin to have on the economy and 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.

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. AP2009/02/2250

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.