|
Financial markets were driven higher during the quarter by a confluence of factors. The U.S. economy moderated as expected, but the Fed continued to hold short-term interest rates steady, oil prices declined albeit modestly, and corporate profits continued to grow vigorously. U.S. stocks moved broadly higher, with some indexes reaching new all-time highs. Foreign developed and emerging stock markets performed even better for the quarter, boosted by currencies that were generally stronger against the U.S. dollar. Bonds provided low, yet satisfactory, gains during the quarter as longer-term interest rates rose very slightly and credit default rates remained quite low. After correcting in the third quarter, many commodities prices increased during the fourth quarter.
Equities Review
The U.S. stock market rose 6.7% for the fourth quarter as measured by the S&P 500 Index. Although the S&P 500 has yet to eclipse its all-time high, reached in early 2000, indexes such as the Dow Jones Industrial Average and the Russell 2000 Index of small company stocks, among others, reached new territory in the fourth quarter. Value and growth indexes rose in parallel through November; however, when the markets took a breather in December, value stocks held up better than their growth counterparts. Hence, across various capitalization ranges, value stocks again outperformed growth stocks during the period. In addition, small-capitalization stocks resumed their dominance over large-cap stocks with the Russell 2000 Index returning 8.9% for the quarter. From a sector perspective, the materials and energy sectors were strongest, rising more than 11% during the quarter, while the health care and consumer staples sectors lagged.
Foreign developed and emerging markets stocks performed even better, both in local currency terms and in U.S. dollars. The MSCI EAFE Index of developed foreign markets returned 10.4% in U.S. dollars for the period, and the MSCI Emerging Markets Index returned 17.6%. U.S. dollar returns beat local currency returns somewhat as the U.S dollar lost .8% during the quarter versus 19 currencies tracked by the J.P. Morgan Dollar Index, adding a currency gain for unhedged overseas investors.
Fixed Income Review
Due to a fair amount of uncertainty regarding the Fed’s next interest rate move, U.S. Treasury yields moved within a trading range during the quarter, finishing slightly higher than where they started. The yield on the ten-year U.S. Treasury bond rose six basis points (0.06%) to 4.71%. In general, high credit quality bonds performed in line with their current yields. However, given high corporate profitability rates, and continued low default rates, lower credit quality bond prices appreciated. The Lehman Aggregate Index returned about 1.2% for the period, while the Lehman U.S. Corporate High Yield Index returned 4.2%. The U.S. dollar depreciation, especially against European currencies, boosted the returns for unhedged foreign bond investments.
| Fourth Quarter 2006 and Twelve Months Year to Date |
| Table
of Stock and Bond Returns |
| |
|
|
Period
Return to 12/31/06* |
|
| |
|
|
Fourth
Quarter
|
|
12 Months
Ending Year to Date |
|
| U.S.
Stocks |
|
| |
S&P
Index** |
6.7% |
|
15.8%
|
|
| |
Average
Diversified U.S. Equity Mutual Fund |
7.0% |
|
12.7% |
|
| |
Russell
2000 # |
8.9% |
|
18.4% |
|
| |
|
|
|
|
|
|
| |
Sector
Mutual Funds |
|
|
|
|
| |
|
Technology
|
6.1% |
|
7.2% |
|
| |
|
Health
|
2.7% |
|
4.1% |
|
| |
|
Communications
|
11.1% |
|
20.0% |
|
| |
|
Financial
|
6.9% |
|
16.9% |
|
| |
|
Real
Estate |
10.1% |
|
33.7% |
|
| |
|
Natural
Resources |
8.2% |
|
10.5% |
|
| |
|
|
|
|
|
|
| Foreign
Stocks |
|
|
|
|
| |
MSCI
Europe, Australia & Far East (EAFE) ## |
10.4% |
|
26.3% |
|
| |
Average
Diversified Foreign Equity Mutual Fund |
10.8% |
|
25.1% |
|
| |
|
|
|
|
|
|
| |
Regional/Specialty
Mutual Funds |
|
|
|
|
| |
|
Europe
|
12.5% |
|
33.1% |
|
| |
|
Diversified
Pacific/Asia |
10.7% |
|
18.5% |
|
| |
|
Diversified
Emerging Markets |
17.9% |
|
32.6% |
|
| |
|
|
|
|
|
|
| U.S.
Bonds |
|
|
|
|
| |
Lehman
Brothers Intermediate Gov't Bond Index*** |
0.9% |
|
3.8% |
|
| |
Lehman
Brothers Intermediate Credit Index ð
|
1.3% |
|
4.5% |
|
| |
Intermediate
Municipal Bond Mutual Funds (National) |
0.7% |
|
3.7% |
|
| |
High
Yield Bond Mutual Funds |
4.0% |
|
10.1% |
|
| |
|
|
|
|
|
| Foreign
Bonds |
|
|
|
|
| |
Citigroup
Non-U.S. World Gov't Bond Index ### |
2.1% |
|
6.9% |
|
|
|
|
|
|
|
| * |
Mutual
Fund return data are from Morningstar. |
|
| ** |
Capitalization-weighted
index of 500 very large U.S. companies. The 500 are chosen to
achieve a fair cross-section of U.S. industrial and service sectors.
Recent median capitalization of approximately $47 billion. |
|
| *** |
Lehman
Brothers index of U.S. Treasury bond total returns (i.e., interest
plus or minus change in price). Bonds in index have intermediate
maturity of about 4-7 years. No mortgage-backed securities included. |
|
| ð |
Lehman
Brothers index of U.S. investment grade corporate bond total
returns (i.e., interest plus or minus change in price). Bonds
in index have intermediate maturity of about 4-7 years. |
|
| # |
Index
of small U.S. companies. Recent median capitalization of approximately
$1.0 billion. |
|
| ## |
International
stock index indicating return of large foreign companies of 21 major
developed countries (Japan, UK, and Germany have the highest weightings).
Returns are converted to U.S. dollars. No emerging market stocks
are included. |
|
| ### |
Citigroup
index of total return of foreign government bonds issued by major developed
foreign countries (Japan, Germany, France, and UK have the highest weightings).
Returns are converted to U.S. dollars. |
|
| Back
to Market Reviews |
|
|
