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December 2012 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 December 2012.

Despite a month of uncertainty over fiscal policy matters, equity markets closed out the month of December on a positive note and capped off an eventful year for the financial markets. For the year, the S&P 500 Index® posted a total return of 16.0 percent and recorded its best yearly performance since 2009.

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

In spite of lingering concerns about the fiscal cliff of automatic spending cuts and expiring tax breaks, investors rallied on the last day of trading and sent the markets higher for the month For the month, small-cap stocks, as measured by the Russell 2000 Index, led all domestic equity markets higher advancing 3.6%. Midcap stocks, as measured by the Russell Midcap Index and large-cap stocks, as measured by the S&P 500 Index, also moved upward for the month posting total returns of 2.3 percent and 0.9 percent, respectively.

For the year of 2012, the S&P 500 Index recorded positive returns 9 out of the 12 months and closed out the year 16.0 percent higher than yearend 2011. As measured by the Russell style indexes, value stocks outperformed growth stocks for the year.

In December, the S&P 500 sectors turned in mixed results with 5 of the 10 sectors ending in positive territory. Financial stocks, which have outpaced the other sectors for the year, had the strongest performance for the month posting a total return of 4.6 percent.

Materials and consumer staples also did well posting returns of 2.9 percent and 2.3 percent, respectively.

For the year, 7 of the 10 S&P 500 sectors produced double-digit returns led by financials, consumer discretionary and health care all largely driven by a gradually improving U.S. economy. The more defensive utilities sector, posted the only loss for the year declining 2.9 percent.

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

Global equity markets extended their positive gains in December as China's economy regained momentum and investors became more confident in policymakers ability to address the European debt crisis and the U.S. fiscal cliff challenges. For the year, the Morgan Stanley Capital International Europe, Australasia, and Far East Index of developed countries advanced 17.3 percent while the MSCI Emerging Markets Index fared even better gaining 18.8 percent for the year.

Japanese stocks also moved upward in December as encouraging economic data from the U.S. and China help rally the markets. During the month, stocks advanced as the election of a new pro-stimulus prime minister drove expectations of additional monetary easing and tighter inflation control. Following the election, the Japanese currency (yen) reached its lowest level against the U.S. dollar in more than 2 years which helped boost the shares of major exporters for the month.

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

In the U.S. fixed income markets, long-term government bond prices were mostly unchanged for the month as investor's maintained optimism that a fiscal policy deal could be made. For the month, the Barclays U.S. Aggregate Bond Index posted a loss of 0.14 percent. Over the longer 1-and 5-year time periods, U.S. investment-grade bonds posted respectable gains supported by historic low interest rates, heavy central bank purchases, and strong demand from retail and institutional investors. For the 1- and 5-year time periods, the Barclays U.S. Aggregate Bond Index posted total returns of 4.2 percent and 5.9 percent, respectively.

Demand for municipal bonds declined in December as concerns about looming tax increases sent investors retreating from the tax-advantaged issues. For the month, the Barclays Municipal Bond Index declined 1.2 percent. Over the longer 1- and 5-year time periods, municipal bonds have posted positive returns of 6.8 percent and 5.9 percent, respectively.

Treasuries prices declined and yields increased in December as signs of accelerating U.S. economic growth led to lower demand. During the month the Federal Reserve, (Fed) announced it would keep interest rates at near zero until the unemployment rate falls below 6.5 percent; the first time the Fed has explicitly tied rates to an economic milestone. For the month, the yield on the benchmark 10-Year Treasury note closed at 1.78 percent while the yield on the 30-YearTreasury Bond ended the month at 2.95 percent.

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.

Now that falling off the so-called "fiscal cliff" has been avoided, the next challenge facing U.S. political leaders is how to address the U.S. debt ceiling. How will the financial markets respond if political gridlock once again takes center stage?

Risk Disclosures

Securities Issued by State Farm VP Management Corp. For more information, call 800-447-4930.

This recap has been prepared by State Farm VP Management Corp. for informational purposes and should not be considered a recommendation to buy or sell any security. Any opinions discussed herein reflect our judgment as of the date of publication and are subject to change.

The MSCI Emerging Markets Index is a capitalization-weighted index of stocks from 26 emerging markets that only includes issues that may be traded by foreign investors.

Investing involves risk, including potential for loss.

AP2013/11/2007

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