November 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 November 2008 reflects on the continued declines in the global equities markets and the modest rebound in most segments of the bond markets. Although declines in the global equities markets were not of the magnitude of the past two months, equity investors continued to react negatively to lingering disappointment in the credit markets and discouraging economic news. Commodity and energy prices also continued to fall while bond prices generally climbed as expectations of higher inflation waned and as investors sought the safe haven of government bonds. 

Let’s begin with a recap of the U.S. equities markets.

Despite an extraordinary 18% rally the last five trading days of November in the S&P 500 Index, U.S. equities markets slid to new bear market lows on a mixture of poor economic data, questionable earnings forecasts, and growing uncertainty about the plans to combat the credit crisis. 

The Federal Reserve introduced new lending programs in its ongoing attempt to revive a damaged banking system, the broader financial sector and the economy. As part of its plan, the Fed announced that it would buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac and, with the assistance of the Treasury Department, develop a $200 billion program to lend money against securities backed by car loans, student loans, credit card debt, and small business loans.     

Fresh economic data continued to be bleak, with revised data indicating that U.S. Gross Domestic Product – or GDP – contracted by a 0.5% annualized rate in the third quarter. In addition, housing prices resumed their declines and the unemployment rate for October climbed to 6.5%, exceeding the highest level from the 2001 recession. Given the weakening job market and the tighter consumer credit environment, retailers cut prices significantly in anticipation of a weaker than normal holiday season. Consumers and businesses alike reduced spending in October.

Given this background, the small cap Russell 2000® Index and Russell Midcap® Index stocks led the domestic equity markets lower for the month losing -11.8% and -10.2%, respectively.  Large cap stocks, as represented by the S&P 500 Index, held up better than their smaller peers, but also ended the month with a steep decline of  -7.2%. Growth stocks fared slightly worse than Value stocks across all market capitalizations.

All major U.S. equity indexes increased their losses on a year-to-date and one-year basis.  Year to date through the end of November, mid cap stocks have declined the most with the Russell Midcap Index falling -44.0% 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 this past year, each of the major U.S. equity market indexes entered negative territory over the longer five-year timeframe as well.  

From an industry sector perspective, seven out of the ten industry sectors within the S&P 500 Index lost ground during the month.

Despite a rally following the government's efforts to stabilize Citigroup with a $20 billion capital injection, Financials stocks were the weakest sector, declining over -18.7% for the month.  Information Technology stocks suffered on fears of slowing sales and dropped over -11.4% during the month while Materials, Consumer Discretionary, and Industrials stocks also underperformed the broad market.  The Consumer Staples and Health Care sectors also lost ground, but held up better than the broad market.  

On a brighter note, the traditionally more defensive sectors of Telecommunication Services and Utilities posted modest gains during the month of 6.2% and 2.4%, respectively.  Energy stocks also eked a small gain of 0.4% even as crude oil prices approached $50 a barrel, over 65% below peak prices of nearly $147 a barrel in July.    

Let’s now turn our attention to non-U.S. equity markets.

Europe's equities were pushed lower during November as rising unemployment and falling commodity prices weighed on the markets despite signs of easing inflation.  All European countries, with the exception of Sweden, posted declines in local currency terms during the month.  The British pound sterling declined -5% relative to the U.S. dollar while the euro was relatively flat. For the month, the MSCI Europe Index dropped over -6.8% and has posted a -48.8% loss year-to-date in U.S. dollar terms.   Over the longer five-year timeframe, European equities have produced annualized returns higher than those obtained in the U.S., gaining over 2.6%.

Japanese stocks held up better than most developed countries during November, declining only -1.3% (in U.S. dollar terms) for the month.  However, Japan's economy slipped into recession for the first time since 2001 as business and consumer spending declined.  The Japanese yen rose 3.1% against the U.S. dollar during the month further hurting exporters while benefiting U.S. investors in Japanese stocks.  On a year-to-date and one-year basis, Japanese stocks have lost over -34.4% and -37.0% respectively, in U.S. dollar terms.  Japan’s five-year returns have remained in positive territory gaining an average of 0.8%, but have lagged most other developed countries over this timeframe.

In the U.S. fixed income markets, most segments gained ground in November as investors sought the safe haven of U.S. Treasuries, expectations of higher inflation declined, and some stability returned to the banking system. Long-term Treasury bond prices rose dramatically, and most other government issues also produced strong gains. Investment-grade corporate issues fared well, but the high-yield sector continued to perform poorly. 

With prices on U.S. Treasuries increasing, yields fell across the maturity spectrum with yields on very short-term Treasuries falling to multi-decade lows of nearly 0%. Intermediate and longer-term Treasury yields fell more sharply causing the yield curve to flatten somewhat during the month. Among major U.S. fixed income indexes, the Barclays Capital U.S. Aggregate Bond Index gained over 3.2% for the month and climbed back into positive territory on a year-to-date basis as well with a gain of nearly 1.5%.  On a three-year and five-year basis, bonds have gained over 4.5% and 4.1%, respectively, highlighting the positive effect bonds can have in an investors asset allocation mix over longer periods of time.  Investors continued to punish higher-risk asset classes as high-yield bonds recorded sharp declines during the month - on par with the steep drop in the U.S. equities markets.  For the month, the Barclays Capital High Yield Index tumbled over -9.3%, increasing its year-to-date losses to a stunning -31.4%.  Municipal bonds ended the month in positive territory with the Barclays Capital Municipal Bond Index gaining 0.32%, but remains in negative territory year-to-date with a loss of -3.9%.  Over the longer five-year timeframe, municipal bonds have returned a positive 2.6%.

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. Will the financial markets close out the year on a more positive tone?  Or will expectations of weak holiday sales and subdued consumer spending continue to dampen investor confidence?

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.

AP2008/12/1770

Past performance is no guarantee of future results. 

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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.