Mutual Funds

August 2013 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.

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This is the recap for the month of August 2013.

Equity markets declined in August on fears of potential reductions in the Federal Reserve's quantitative easing program and rising tensions in the Middle East. For the month, most of the major U.S. and international equity markets declined following gains in July.

Now let's first review the U.S. equities markets.

In the U.S., stocks got off to a solid start the first week in August with the S&P 500 Index surpassing the 1,700 mark for the first time in history. Late in the month, unsettled conditions in the Middle East and investor concerns over how the potential tapering of the Federal Reserve's bond purchase program might affect the overall economy, pushed stocks lower for the month.

For the month, small-capitalization stocks, as measured by the Russell 2000 Index®, led the major stock indices downward declining 3.2%. Large- and mid-cap stocks, as measured by the S&P 500 Index and the Russell Mid-cap Index®, also lost ground for the month declining 2.9 percent and 2.7 percent, respectively.

All ten of the sectors within the S&P 500 posted negative returns for the month, with stocks in financials, utilities, and consumer staples losing the most ground. However, despite the pullback in August, all ten of the S&P sectors are securely in positive territory year-to-date with seven of the ten sectors posting double-digit returns. Stocks in healthcare, consumer discretionary, and financials led the S&P sectors for the year-to-date time period, posting returns of 24.5 percent, 22.5 percent and 19.6 percent, respectively. Stocks in telecommunication services and materials have gained the least so far year-to-date, advancing 6.2 percent and 8.7 percent, respectively.

On the economic front, U.S. manufacturing activity picked up in August, and global activity also showed improvement, particularly in developed regions. Corporate earnings remained strong with third-quarter results posting better than second-quarter, and the unemployment rate declined to 7.3 percent from 7.4 percent in July, its lowest level since the end of 2008.

Let's now turn our attention to the foreign equities markets.

Global equity markets retreated in August despite growing evidence that the 17-nation euro zone is emerging from the longest-running recession since World War II. Both developed and emerging market equities declined for the month with a steeper contraction for emerging markets. For the month, developed countries (excluding the U.S.) declined 1.3 percent while emerging markets declined 1.7 percent.

Japanese stocks also lost ground in August falling 2.2 percent despite signs of an expanding economy. Recent Japanese economic data showing rising prices, falling unemployment, higher incomes, and increased factory activity has supported an ongoing recovery of the world's third-largest economy. Year-to-date, Japan led the developed countries (excluding the U.S.) in total returns gaining 14.7 percent.

Let's now switch our focus to the U.S. fixed income markets.

In the U.S. fixed income markets, long-term government bonds ended the month lower as a consensus grew that the Federal Reserve would soon begin to taper the volume of its asset purchases and allow long-term interest rates to increase to higher levels. For the month, the Barclays U.S. Aggregate Bond Index declined 0.5 percent and lowered its year-to-date return to -2.8 percent. Over the longer 1-and 5-year time periods, the Barclays U.S. Aggregate Bond Index has posted annualized total returns of -2.5 percent and 4.9 percent, respectively.

The U.S. municipal bond market experienced further decline in August as investors worried that the credit risks exposed in Detroit's mid-July bankruptcy filing might spread to other areas. For the month, the Barclays Municipal Bond Index®??declined 1.4 percent and lowered its year-to-date return to -4.9 percent. Over the longer 1- and 5-year time periods, municipal bonds have posted annualized total returns of -3.7 percent and 4.5 percent, respectively.

U.S. Treasury yields touched a two year high in mid-August with the benchmark 10-Year Treasury note reaching 2.90 percent before declining on safe-haven buying activity to end the month at 2.78 percent, a 1.00 percent increase from yearend 2012. The yield on the 30-Year Treasury Bond closed the month at 3.70 percent, up 0.75 percent from yearend 2012.

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.

Investors are anxiously waiting to see whether or not the Federal Reserve will begin to taper the volume of its bond purchasing program when it meets in mid-September. One question, if tapering begins, how will the financial markets respond? Tune in next month to find out.

Risk Disclosures

Securities through registered representatives of State Farm VP Management Corp., One State Farm Plaza, Bloomington, Illinois 61710-0001, 800-447-4930.

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.

AP2013/11/2181

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