October State Farm® Market Recap

Back to Market Recap

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 October 2008 reflects on what ended up being a historically painful month in the financial markets.   Stocks, corporate bonds, and commodity prices all suffered sharp declines for a second straight month as global markets continued to absorb and react to the worldwide and coordinated governmental actions aimed at thawing frozen credit markets and injecting liquidity into the financial markets.

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

Despite an impressive rally at the end of October, the U.S. equities markets experienced their worst monthly losses since 1987 as the extended freeze in the credit markets escalated concerns about the effects of a recession on corporate profitability.  Signs of a recession grew during the month as third quarter U.S. Gross Domestic Product – or GDP – contracted at an annual rate of -0.3%, slowed by a major contraction in personal consumption, residential investment, and business spending on equipment and software.  The automobile industry was one of the most negatively impacted areas of the economy as U.S. auto sales had their worst month in 25 years during October and prompted discussions of a merger or federal bailout for General Motors and Chrysler.

The U.S. government continued its activity in providing assistance to the weakening financial markets and economy.  Banks that had accessed funding under the Treasury’s $700 billion Troubled Asset Relief Program – known as TARP – came under increasing pressure to loan out the cash, versus hoarding it.  In addition, the Federal Reserve began buying commercial paper, providing welcome relief and liquidity to companies that were struggling to borrow.  The Fed also reduced its key interest rate twice during the month, cutting the federal Funds Rate from 2% to 1%.

On the employment front, payrolls fell by 159,000 in September which was the largest monthly job-loss figure in five years.  The unemployment rate which remained at 6.1% in September is widely anticipated to increase during the fourth quarter and into next year.

On a somewhat brighter note, sales of existing and new homes were reported to have increased during September, though housing prices remained under pressure.

Given this background, mid cap stocks, as represented by the Russell Midcap Index led all domestic equity markets lower with a loss of -22.4% during October.  The small cap Russell 2000® Index and large cap S&P 500 Index also took steep losses during the month of -20.8% and -16.8%, respectively.  The selling in the equities markets did not discriminate relative to investment style as both Growth and Value stocks experienced significant declines.

All major U.S. equity indexes increased their losses on a year-to-date and one-year basis.  So far this year, mid cap stocks have declined the most with the Russell Midcap Index falling -37.5% while the large cap S&P 500 Index and the small cap Russell 2000 Index have declined -32.8% and -29.0%, respectively.  However, despite the poor equity returns over these shorter timeframes, each major equity market remains in positive territory over the longer five-year timeframe.  From a historical perspective, buying stocks during times when fear and investor pessimism is high has been rewarded over time as compared to buying stocks when markets are in a state of euphoria.

From an industry sector perspective, nine out of the ten industry sectors within the S&P 500 Index produced double-digit declines during the month.

Financials and Consumer Discretionary stocks were among the weakest sectors, declining -22.7% and -19.3%, respectively.  Energy and Materials stocks also underperformed the broad market as commodity prices continued to plunge. Since hitting a peak of over $145 per barrel in July, crude oil has sold-off considerably to under $70 per barrel by the end of October.

Although no industries were spared from declines during the month, the traditionally more defensive sectors of Telecommunication Services, Consumer Staples, Health Care, and Utilities held up better than the broad market.

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

European equities markets posted double-digit losses for the second straight month as worries that an economic recession could be longer lasting and deeper than previously anticipated. During the month, all European countries within the MSCI EAFE® Free Index posted double-digit declines, with some losing more than one-third of their value. Both the euro and British pound sterling declined more than -9% relative to the U.S. dollar as increased demand for the U.S. currency was evident given the heightened financial market stress.  For the month, the MSCI Europe Index dropped over -21.2% and has posted a stunning -45.0% 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 4.9%.

In Japan, stocks declined -14.8% in U.S. dollar terms during October as Japan's financial industry, which had held up better than most Western banks during the recent financial crisis, came under pressure.  The Japanese yen rose over 8% against the U.S. dollar during the month, touching a 13-year high relative to the U.S. currency.   On a year-to-date and one-year basis, Japanese stocks have lost over -33.6% and -37.4%, respectively, in U.S. dollar terms.  Japan’s five-year returns have been positive gaining an average of 0.4%, but have lagged most other developed countries over this timeframe.

In the U.S. fixed income markets, bond prices continued to slide in October with the riskiest asset classes being hit the hardest. Investment-grade corporate securities fared somewhat better but also produced declines. Yields on very short-term U.S. Treasuries fell to nearly 0% at mid-month as investors flocked to a safe haven and as the Fed cut the Federal Funds Rate to 1.00%.  Meanwhile, yields on longer-term Treasuries climbed on investors' concerns that the government's need to raise funds to pay for the Treasury's massive Troubled Asset Relief Program would increase the threat of inflation in the future. 

Among major U.S. fixed income indexes, the Lehman Aggregate Index lost over -2.3% for the month and entered negative territory on a year-to-date basis as well with a loss of over -1.7%.  However, on a three-year and five-year basis, bonds have gained over 3.6% and 3.4%, respectively, highlighting the positive effect bonds can have in an investors asset allocation mix over longer periods of time.  Investors continued to shun higher-risk asset classes as high-yield bonds recorded sharp declines during the month - on par with the steep drop in the U.S. equity market.  For the month, the Lehman Brothers High Yield Index tumbled over -15.9% bringing its year-to-date losses to -24.4%.  Municipal bonds also sold off, but staged a dramatic recovery by month end to pare their losses.  During October, the Lehman Brothers Municipal Bond Index lost over -1.0% and remains in negative territory year-to-date with a loss of -4.2%.  Over the longer five-year timeframe, municipal bonds have returned a positive 2.7%.

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 financial markets remain in turmoil or will we begin to see signs that the easing of monetary policy and aggressive governmental actions around the world are helping to stave off a deeper and longer lasting global financial crisis?

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.

AP2008/11/1615

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.

Investments in bonds are subject to interest rate, credit and inflation risk.

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.

The stocks of small companies are more volatile than the stocks of larger, more established companies.
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.
Diversification does not ensure a profit or protect against losses in a declining market.

It is not possible to invest directly in an index.

“S&P 500®” is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by the State Farm Mutual Fund Trust.  The State Farm S&P 500 Index Fund (the “Fund”) is not sponsored, endorsed, sold or promoted by Standard & Poor’s makes no representation regarding the advisability of investing in the Fund.   
The Russell 2000® Index is a trademark/service mark, and RussellTM is a trademark of the Frank Russell Company.  The State Farm Small Cap Index Fund (the "Fund") is not sponsored, endorsed, sold or promoted by, nor in any way affiliated with the Frank Russell Company.  Frank Russell Company is not responsible for and has not reviewed the Fund nor any associated literature or publications and Frank Russell Company makes no representation or warranty, express or implied, as to their accuracy, or completeness, or otherwise.

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 EAFE® Free Index is a trademark, service mark and the exclusive property of Morgan Stanley Capital International, Inc.  ("MSCI") and its affiliates and has been licensed for use by the State Farm Mutual Fund Trust (the "Trust").  The State Farm International Index Fund (the "Fund"), based on the EAFE® Free Index, has not been passed on by MSCI as to its legality or suitability, and is not issued, sponsored, endorsed, sold or promoted by MSCI.  MSCI makes no warranties and bears no liability with respect to the Fund.  MSCI has no responsibility for and does not participate in the management of the Fund assets or sale of the Fund shares. The Trust's Prospectus contains a more detailed description of the limited relationship MSCI has with the Trust and the Fund.