July 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 July 2009 reflects on the upturn in the global equity markets as stocks picked back up on the rally that began in March. In the bond markets, corporate and high-yield bond prices advanced while U.S. Treasury bond prices remained relatively unchanged. Commodity prices saw an overall rise, while crude oil prices hovered in a close range before ending the month of July at $69 per barrel.

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

U.S. stocks ended the month with substantial gains as investors gained confidence and several corporations reported better-than-expected quarterly earnings and released new upbeat outlooks.  The Dow Jones Industrial Average, Standard & Poor’s 500 Index, and the Nasdaq Composite Index all rallied with gains of 8 to 9% for the month.   

Encouraging economic data showed signs that the recession may be over and that the U.S. is now on a road to recovery.  The national unemployment rate decreased from its peak in June.  Single family housing starts were up as the housing sector’s outlook increased for the third month in a row.  Confidence was further instilled among investors when the Federal Reserve chairman, Ben Bernanke, stated that the economy should begin to grow by the end of the year.      

In the end, U.S. stock prices were lifted in July as investors reacted to both the positive economic data and better-than-expected corporate earnings reports.  Small-cap stocks, as represented by the Russell 2000® Index, and mid-cap stocks, as represented by the Russell Midcap® Index, led all domestic equity markets higher during July with substantial returns of 9.6% and 8.8%, respectively.  The large cap S&P 500 Index also posted a strong return of 7.4% in July.  Over the longer five-year timeframe, both the Russell Midcap® Index and the Russell 2000® Index are in positive territory while the S&P 500 Index remains slightly in negative territory.  Value stocks outperformed growth stocks across all market capitalizations for the month. 

From an industry sector perspective, all ten sectors within the S&P 500 Index posted positive returns for the month.  The materials sector saw an unprecedented positive return for July, advancing over 13.3%.  Financial stocks rose 8.8% on news of impressive quarterly earnings reports from Goldman Sachs and JPMorgan Chase, an indication of a less competitive banking environment with access to low-cost capital.  Technology stocks posted solid gains of 9.1% for the month following stronger than expected profit reports from Intel, IBM, Google, and Apple. 

Telecommunication and utility stocks had the most modest returns for the month, both gaining under 4%, due to a heightened interest in cyclical stocks that have the potential to produce greater returns.  Energy stocks also saw a lackluster 4.3% return as oil prices fluctuated in a close range and ended July at the previous month’s price level.       

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

European equity markets also posted strong gains as investors reacted to better-than-expected quarterly corporate earnings reports.  The MSCI Europe Index was up 10.5% in U.S. dollar terms for July as all but one country within the index posted positive returns for the month.  Among European markets, Sweden had the highest return, gaining nearly 18%; and both Spain and the Netherlands were up over 14% for the month.  Finland was the weakest European equity market, declining -0.16% during July.  Over the longer five-year timeframe, European equities have produced positive average annual returns of 5.53%.  From a currency perspective, the euro gained 1% against the U.S. dollar during the month, while the British pound sterling rose 0.7%. 

Japanese stocks reacted well to positive economic data that showed some signs of improvement, but also raised concerns about deflation.  For the month, Japanese stock rose 4.3% in U.S dollar terms, but underperformed most other developed markets.  Over the longer five-year timeframe, Japanese equities entered positive territory during July, with an average annual return of 1.6%.  The Japanese yen gained slightly on the U.S. dollar during the month. 

In the U.S. fixed income markets, bonds posted overall gains during the month.  Corporate bonds continued to perform well in response to further stabilization of the economy and positive news in the financial sector.  U.S. Treasuries reacted to data that showed subdued inflationary pressure, and were able to overcome a small portion of the declines in price posted in June.  Municipal bonds posted a strong gain due to new confidence among investors.

For the month, yields fell slightly across the U.S Treasury yield curve, with yields on short-term bonds losing more ground than longer-term issues.  The Treasury’s auction of government debt had mixed results as the yield on the benchmark one-year Treasury fell by eight basis points while the yield on the benchmark 30-year Treasury fell by one basis point.   

Among major U.S. fixed income indices, the Barclays Capital U.S. Aggregate Bond Index gained 1.6% for July.  High-yield bonds posted strong gains with the Credit Suisse High Yield Index climbing 6.1% during the month.  Year to date, high-yield bonds have gained almost 35%.  Municipal bonds also increased in July with the Barclays Capital Municipal Bond Index gaining 1.7%.  Over the longer one- and five-year timeframes, municipal bonds have produced positive total returns of 5.1% 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 earnings reports, 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.

AP2009/08/3170

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.