First Quarter 2009 Market Review

Financial markets declined for the sixth consecutive quarter. It was an extremely volatile quarter for U.S. equities, with the S&P 500 Index dropping 8.4% in January, 10.6% in February and another 9% in the first week of March. The market then had a dramatic turnaround and roared upward about 20% to finish March with an 8.76% net gain, the best month since 1933. Generally, international stock markets followed a similar pattern: down, down, and then up (net down). U.S. bonds experienced both positive and negative forces and produced breakeven to moderately strong results. International bonds were generally in the red due to currency losses.

Equities Review

Sentiment was quite negative during the quarter as investors hesitated to commit additional capital in a very uncertain environment. Major equity indexes reached levels not seen since the mid- to late-1990s in early March. The average diversified U.S. equity fund returned -9.2% for the quarter. Growth stocks held up far better than value stocks due to growth stocks’ more consistent and higher earnings potential as well as their limited need for external financing. The Russell 3000® Growth Index returned -4.5% and the Russell 3000® Value Index returned -17.0% for the quarter. The traditionally more growth-oriented sectors of the Russell 3000® Index, including information technol¬ogy and health care, returned +3.5%, and -8.0%, respectively, for the period. Value-oriented sectors, including financials and industrials, returned -27.0%, and -20.7%, respectively, for the quarter. Large-cap stocks outperformed small-cap stocks; the Russell 1000® and Russell 2000® indexes returned -10.5% and -15.0%, respec-tively. Real estate stocks were pummeled in the first quarter; investors feared business fundamentals would worsen significantly respecting commercial, office, and industrial properties as a reflection of the U.S. housing slump and decreases of consumer and business spending. Finally, the average Morningstar long-short alternative strategies fund preserved capital fairly well, returning -3.9% for the period.

International stocks also experienced significant declines. Local currency returns were negative, and losses for the U.S. dollar investor were worsened by currency losses due to strengthening of the greenback. The dollar rose 4.4% versus 19 currencies tracked by the J.P. Morgan dollar Index for the period. Investors favored small-cap stocks over large-cap stocks, with the MSCI EAFE Small-Cap Index returning -9.6% and the MSCI EAFE Large-Cap Index falling -14.2%, both in U.S. dollars. Emerging markets stocks were surprisingly resilient in this challenging environment and dramatically outperformed developed country stocks. The MSCI Emerging Markets Index returned +1.0% for the quarter, while the MSCI EAFE Index of developed foreign equi¬ties declined -13.9% in U.S. dollars. 

Fixed Income Review

Fixed income performance varied considerably, but unlike last quarter, the dispersion of returns was not solely a function of quality. Municipal bonds, high-yield bonds, and agency mortgage-backed securities (MBS), which benefited from the federal MBS purchase program, had good returns and outperformed high-grade corporate bonds and U.S. Treasuries. The Fed Funds rate remained at an extremely low level: a range of 0-.25%. Interest rates generally rose across the yield curve, particularly on the longer end of the curve, and thereby decreased returns. Spreads on asset-backed securities and high-yield bonds narrowed substantially while spreads on high-grade corporate bonds widened slightly. The Barclays Capital U.S. Aggregate Bond Index returned 0.1% for the quar¬ter. Foreign bonds lagged their domestic counterparts mainly because of U.S. Dollar appreciation. The Barclays Global Aggregate ex-U.S. Bond Index fell -5.4% for the quarter. Nonetheless, the average emerging markets bond fund bounced after huge losses in the latter part of 2008 and returned 1.5% in U.S. dollars for the period.