June 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 June 2009 reflects on the overall modest declines in the global equity markets, ending a three-month long rally. In the bond markets, corporate and high-yield bond prices advanced while U.S. Treasury bond prices declined causing yields to further increase. Commodity prices in general pulled back, but crude oil prices climbed to nearly $70 per barrel by the end of June, up from approximately $50 per barrel at the end of March.

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

U.S. stocks ended the month mostly flat following the gains of the previous three months.  Positive signs that the economy had stabilized were tempered by fears of a slow recovery and poor earnings visibility by corporations.   

Economic data showed signs of stabilization, however at weak levels.  The Federal Reserve’s Beige Book report indicated continued weakness in consumer spending and in labor markets, though temporary staffing showed improvement.  First-time unemployment claims were down from their peak.  The durable goods report from May provided positive news, with orders up and inventories down.  The U.S. Treasury also allowed several financial companies to pay back $68 billion in TARP assets after they proved they could raise capital in the public markets without government assistance.   

In the end, U.S. stocks were mostly flat during June as the three-month long market rally lost steam.  Small-cap stocks, as represented by the Russell 2000® Index, led all domestic equity markets higher during June with a gain of 1.5%.  The Russell Midcap® Index and large cap S&P 500 Index eked out small gains of 0.4% and 0.2%, respectively for the month.  The Russell Midcap Index continues to be the only major U.S. equity market index posting a positive five-year average return.  Growth stocks outperformed Value stocks across all market capitalizations during the month. 

From an industry sector perspective, six of the ten sectors within the S&P 500 Index posted positive returns for the month.  Utilities stocks performed the strongest during the month, advancing over 5.1%.  Technology stocks also posted solid gains of 4.0% for the month with help from Microsoft, which rose nearly 14% in anticipation of the launch of Windows 7 in October.  Health Care stocks also advanced 2.5% on anticipation that the U.S. Senate would reduce the price tag associated with a sweeping health care reform bill making its way through Congress.

Materials stocks were the weakest, declining -4.9% for the month as the recent rally in commodities lost momentum.  Despite rising oil prices, Energy stocks dropped      -4.7% due in part to historically high inventory levels.  Financial and Industrials stocks also lost ground, declining -2.2% and -2.4% respectively.       

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

European equity markets posted a loss of nearly -2.0% in U.S. dollar terms during June, ending a three-month long rally.  Among European markets, Spain gained the most during the month, climbing over 4%.  Greece was the weakest European equity market, declining -6.3% for the month.  The United Kingdom was also weak, posting a -1.3% loss for the month.  Over the longer five-year timeframe, European equities have produced positive average annual returns of 2.3%.  From a currency perspective, the euro lost ground against the U.S. dollar during the month, while the British pound sterling gained against both euro and the U.S. dollar. 

Japanese stocks posted another month of gains, rising a modest 1.8% in U.S dollar terms and outperforming most other developed countries. Japan’s benchmark Nikkei 225 Index crossed the 10,000 mark for the first time in eight years.  Over the longer five-year timeframe, Japanese equities remain in negative territory, with a -0.6% average annual return.  The Bank of Japan remained optimistic about the economy, raising its outlook for a second month in a row.  The Japanese yen lost 1% against the U.S. dollar during the month. 

In the U.S. fixed income markets, bonds posted overall modest gains during the month.  Credit-sensitive issues such as corporate bonds continued to perform well in response to increasing optimism that the recession may be nearing its bottom, and gains among high-yield issues were exceptional.  Returns from U.S. Treasuries were marginally negative amid concerns about rising U.S. Government borrowing to finance the ballooning deficit. Municipal bonds recorded a loss due to worries over the poor condition of several states’ finances.

For the month, yields rose across the U.S Treasury yield curve with yields on long-term bonds increasing by a greater extent as compared to shorter-term issues, which 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 0.6% for June.  High-yield bonds posted strong gains with the Credit Suisse High Yield Index climbing 3.6% for the month of June.  Year to date, high yield bonds have gained over 27%.  Municipal bonds lost ground in June as the Barclays Capital Municipal Bond Index lost over -0.9%.  Over the longer one- and five-year timeframes, municipal bonds have produced positive total returns of 3.8% and 4.1%, 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 regain their footing and resume their advance or is a new downward trend beginning?  

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. AP2009/07/3067.

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.

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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, Australasia and Far East Free (EAFE® Free) Index currently measures the performance of stock markets of Europe, Australia, New Zealand, and the Far East and takes into account local market restrictions on share ownership by foreigners. EAFE® Free is meant to reflect actual opportunities for foreign investors in a local market. Returns are measured in U.S. dollars.

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.