March 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 March 2009 reflects on the rally in the global equities markets, sparked by optimism that various worldwide governmental actions and economic stimulus plans would help lead to a global economic recovery. In addition, bonds prices advanced and commodity prices generally increased, with crude oil ending the month over $49 per barrel, up 11% year-to-date through March 31.     

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

After two months of steep declines, U.S. stocks climbed on positive earnings news from major financial companies and optimism over the Obama administration's roadmap for economic recovery. 

During March, the stock market got a boost as several large financial companies including Citigroup, Bank of America and JPMorgan Chase all announced they produced operating profits during the first two months of the year.  In addition, the U.S. Treasury announced its $1 trillion Public-Private Investment program – or PPIP – which calls for large private investors to partner with the government to buy troubled loans and securities, allowing banks the means to remove toxic assets from their books.  The Obama administration also became more notably involved in the automotive industry by pressuring the chief executive of General Motors into resignation and rejecting the restructuring plans that GM and Chrysler had put forth in an attempt to receive another infusion of government funds.   

Economic data remained mostly negative as a revised gross domestic product report showed the economy had shrank at an annualized rate of 6.3% in the fourth quarter of 2008.  In addition, unemployment climbed to 8.5% during March.  On a brighter note, orders for durable goods and sales of new and previously owned homes increased.   Housing starts also increased and consumer prices rose, easing concerns about deflation. 

In the end, U.S. stocks staged a broad rally for the month.  Mid cap stocks, as represented by the Russell Midcap® Index, led all U.S. equity markets higher during the month with a gain of 9.2%.  The small cap Russell 2000® Index and large cap S&P 500 Index also posted sizable gains of 8.9% and 8.8%, respectively.  Growth stocks performed slightly 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 -40.8% while the large cap S&P 500 Index and the small cap Russell 2000 Index have declined -38.1% and -37.5%, respectively.  In addition, driven by the magnitude of the losses over 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 stocks advanced over 17.6% during the month, driven by the positive news that Citigroup, Bank of America, and JPMorgan Chase all produced operating profits during the first two months of the year.  Optimism spilled over into other cyclical sectors such as Materials, Information Technology, and Consumer Discretionary stocks which all produced double-digit percentage increases during the month.

More defensive industry sectors, such as Utilities and Consumer Staples, also produced positive gains during the month, but lagged all other sectors within the S&P 500 Index.

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

All European equity markets posted gains during March as the U.S. Treasury's plan to help relieve banks of up to $1 trillion in troubled assets helped to spark a rally in the European financials sector.  Among European markets, Austria gained the most during the month, climbing nearly 25%.  Denmark gained the least, rising 1.4%.  The United Kingdom posted a 3.7% gain for the month.  The euro gained about 4% against both the British pound sterling and the U.S. dollar.  For March, the MSCI Europe Index gained nearly 7% in U.S. dollar terms, but remains in negative territory for the one-year period with a loss of -50%.   Over the longer five-year timeframe, European equities have also produced negative average annual returns of -1.8%.

Japanese stocks also gained ground, rising 2.2% during the month in U.S dollar terms as the Japanese government took several steps to support its struggling economy.  Despite economic data remaining largely negative, the latest governmental actions helped to provide a boost to the market.  The Japanese yen continued to weaken against the U.S. dollar during the month. Over the one year timeframe, Japanese stocks have lost nearly -36% in U.S. dollar terms.  Japanese equities have also produced negative average annual returns over the longer five-year timeframe of -5.3%.

In the U.S. fixed income markets, bonds posted overall gains during the month -driven primarily by the Federal Reserve’s decision to begin adding liquidity into the financial system through the purchase of U.S. Treasuries.  Following its policy meeting on March 18, 2009, the Federal Reserve announced that it would begin purchasing up to $300 billion in long-term Treasuries over the next six months in an attempt to lower yields and encourage investors to purchase other types of securities.  Following the announcement, Treasury yields experienced their largest single-day decline in over 20 years and prices on Treasuries climbed.  

For the entire month, yields on U.S. Treasuries declined across all maturities and the yield curve flattened somewhat as longer-term yields decreased 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 gained 1.4% for the month, and over the one-year timeframe, the Index has gained 3.1%.  On a three-year and five-year basis, bonds have generated a total return of over 5.7% and 4.1%, respectively, highlighting the positive effect bonds can have in an investors asset allocation mix over longer periods of time.  High-yield bonds also performed well during the month with the Barclays Capital High Yield Index gaining over 2.0%. However, over the one year timeframe, high-yield bonds have lost over -19%, but are slightly positive over the longer five-year timeframe.  Municipal bonds remained relatively flat in March as the Barclays Capital Municipal Bond Index managed a small gain of 0.02%.  Over the longer one- and five-year timeframes, municipal bonds have produced positive total returns of 2.3% and 3.2%, 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 continue to recover or are investors only enjoying temporary relief within a longer lasting bear market? 

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. AP2009/04/2596

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.

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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.