May 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 May 2009 reflects on the third straight month of positive returns in the global equities markets, as fresh economic data raised hopes that the rapid deterioration in the global economy had subsided. In addition, corporate and high-yield bond prices also advanced while U.S. Treasury bonds lagged as longer-term yields increased significantly. Commodity prices climbed, with crude oil settling at its highest level since November 2008 and ending the month at over $ 66 per barrel, up 30 % for the month of May.

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

U.S. stocks rallied on positive news concerning bank stress tests , growing economic optimism, and increasing commodity prices.  

Despite fears of a forecasted General Motors’ bankruptcy in the continually-vulnerable economy , investors focused on positive economic data that increased consumer confidence and provided hopeful signals of a forthcoming end to the recession in the latter half of the year.  The federal government’s “stress test” results for several of the largest U.S. banks were not as bad as feared.  Although some major financial institutions are in the process of raising additional capital, the prospect of any of them failing appears to have lessened. Energy stocks received a boost as crude oil prices soared above $66 per barrel.

Economic data pushed consumer confidence up to levels not seen since before the collapse of the credit market.  Despite a half-point rise in unemployment to 9.4% marking the highest level since February of 1983; May saw a slowing pace of job losses and nonfarm payrolls experienced the smallest decline since September.  First-quarter GDP was also revised to reflect a lesser contraction of 5.7%, down from April’s 6.1% level. Pending home sales and home price figures continued to show a slower pace of decline .   

In the end, U.S. stocks staged a broad rally for the third straight month during May .   Year-to-Date returns for the major domestic equity indices turned positive for the first time in 2009.  Large-cap stocks, as represented by the S&P 500, led all U.S. equity markets higher during the month with a gain of 5.6%.  The small-cap Russell 2000® Index advanced 3.0 % while the Russell Midcap® Index climbed 4.3% 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.  Value stocks performed better than Growth stocks across most market capitalizations during the month.   

From an industry sector perspective, eight of the ten sectors within the S&P 500 Index posted positive returns for the month.  Financials stocks performed the strongest and advanced over 13% during the month.  Banking stocks were particularly strong, driven by positive news that the Federal Reserve’s worst-case estimates of banks’ total losses and capital shortfalls were less than previously feared.  Many big name bank stocks rallied on optimism that the worst was over for the industry.  Energy stocks also gained 10.2% during the month as oil futures had their biggest monthly percentage gain in a decade – up nearly 30%.  Health care stocks received a boost on positive reports concerning Pfizer’s planned acquisition of Wyeth. 

More defensive industry sectors, such as Utilities and Consumer Staples, also produced positive gains during the month, but lagged most other sectors within the S&P 500 Index.  Only two sectors posted negative returns during the month; Telecommunications stocks declined -1.3%, and Consumer Discretionary stocks slid -1.1%.

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

European equity markets posted their third consecutive monthly gain, with the MSCI Europe Index advancing 12.4% in U.S. dollar terms.  Among European markets, Austria gained the most during the month, climbing over 2 5%.  Ireland was the only European equity market to lose ground in May, declining -2.1%.  The United Kingdom was also strong, post ing a 13.9% gain for the month. Over the longer five-year timeframe, European equities have produced positive average annual returns of 3.5%.  From a currency perspective, both the euro and the British pound sterling rose against the U.S. dollar during the month. 

Amid signs of improvement in the economy, Japanese stocks also gained ground during the month, rising 10.3% in U.S dollar terms .  Over the longer five-year timeframe, Japanese equities have climbed out of negative territory, reaching positive 0.2% average annual returns.  With encouraging economic data, the Bank of Japan raised its outlook on the economy for the first time in three years.  The Japanese yen gained 3% against the U.S. dollar during the month.  

In the U.S. fixed income markets, bonds posted overall gains during the month as positive returns on corporate issues helped compensate for a second consecutive month of declines on long-term U.S. Treasuries.  Also, although investors remained worried about the banking system, a strong rally in financials stocks suggested increasing confidence that banks’ problems would prove manageable. Corporate bonds and other credit instruments rallied  during the month as signs of recovery in the economy fueled demand for higher-yielding assets. Investors who took advantage of the government’s Term Asset Loan Facility (TALF) program and bought asset-backed securities saw the highest return among all non-government bonds. 

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.  While yields on short-term securities remained anchored by the Fed’s near-zero interest rate policy, long-term yields increased in response to heightened volatility and hedging of mortgage loan inventories by banks, which added pressure on longer-maturity government debt.   These changes helped cause the treasury yield curve to steepen sharply as the difference between two- and 10-year bond yields finished the month at 254 basis points. This is a significant jump considering the spread between two- and 10-year Treasuries began the year at 158 basis points. 

Among major U.S. fixed income indices , the Barclays Capital U.S. Aggregate Bond Index gained 0.73 % for May.  High-yield bonds also advanced during the month, largely due to a sharp rise in automakers’ bonds after it appeared that many of General Motors’ secured debt holders would be repaid in full.  The Barclays Capital High Yield Index was up 6.7 % for the month of May.   Municipal bonds continued to gain ground in May as the Barclays Capital Municipal Bond Index climbed 1.06%.  Over the longer one- and five-year timeframes, municipal bonds have produced positive total returns of 3. 6% and 4.4 %, 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. Can the global equities markets record gains for a fourth straight month or will stocks reverse course and test the lows posted in March 2009?  

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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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.