Third Quarter 2010 Market Review

After racking up robust gains for this quarter, most asset classes are now in positive territory for the year. September, which has historically been a somewhat difficult period for stocks, was extraordinary with equities posting their best gains for this month since 1939. Fixed income returns for U.S., foreign developed countries, and emerging markets were also positive during the quarter. The U.S. dollar weakened against most currencies, boosting returns of foreign stocks and bonds for U.S. dollar investors.

Equity Review

All domestic equity styles posted gains for the third quarter with large cap stocks edging out small cap stocks for the first time since the fourth quarter of 2009. The Russell 1000 (large cap) and Russell 2000 (small cap) indexes returned 11.6% and 11.3%, respectively. Investors favored growth stocks over value stocks. The Russell 3000® Growth Index returned 13.0% while the Russell 3000® Value Index returned 10.1% for the quarter. Economically sensitive sectors such as materials and industrials were among the best performers, gaining 18.3% and 13.7%, respectively. Sectors less dependent on economic conditions such as health care and consumer staples rose 8.6% and 10.8%, respectively, for the quarter. In contrast, financials returned 5.4%, the lowest return among sectors due to the results of commercial banks, which lost -1.0% as a group.

International stocks recovered from the second quarter decline even more than their domestic counterparts. Emerging markets outperformed foreign developed countries stocks for the seventh consecutive quarter, albeit modestly. The MSCI Emerging Markets Index and the MSCI EAFE Index of developed countries gained 18.0% and 16.5%, respectively, for the quarter. The gains across developed regions, however, were somewhat uneven. Stocks in Europe and Asia ex-Japan generally rose sharply during the quarter while Japanese equities lagged the broad market by a wide margin. The MSCI Europe Index, the MSCI AC Asia Ex-Japan, and the MSCI Japan rose 19.4%, 16.6%, and 5.8% for U.S. dollar investors, respectively, for the quarter.

The dollar weakened during the third quarter -5.0% versus 19 currencies tracked by the J.P.Morgan Dollar Index of mainly developed countries. The dollar also fell -5.8% versus 25 emerging market currencies tracked by the MSCI EM Currency (USD) Index. For the quarter, therefore, currency gains by unhedged U.S. investors boosted foreign returns in both industrialized and emerging markets.

Fixed Income Review

Fixed income returns were also positive during the quarter as interest rates generally fell. In the U.S., high-yield bonds and investment grade corporate bonds outperformed U.S. Treasuries and mortgage-backed securities. Quality (or the lack thereof) continued to drive relative performance as illustrated by the 2.7% and 6.7% returns generated by the Barclays Capital (Barcap) Aggregate U.S. Treasury Index and the Barcap U.S. Corporate High Yield Index, respectively. The broad market, as represented by the Barcap U.S. Aggregate Bond Index, returned 2.5% for the quarter. Foreign bonds generally outperformed their domestic counterparts because of significant U.S. dollar weakness. In a reversal from recent quarters, foreign developed countries bonds somewhat outperformed emerging market bonds. The Barcap Global Aggregate ex-U.S. Index rose 10.9% for the quarter and the J.P. Morgan Emerging Market Bond Index increased 8.2%.

 

 

Third Quarter 2010 and Nine Month Year-to-Date 

Table of Stock and Bond Returns

     

Period Return to 9/30/10 *

 
     

Third
Quarter

 

Nine Month
Ending 9/30//10

 
U.S. Stocks
S&P 500 Index** 11.3%

3.9%

  
Average Diversified U.S. Equity Mutual Fund 11.7% 5.5%  
Russell 2000 Index # 11.3% 9.1%  
Sector Mutual Funds
Technology 15.5% 7%  
Health 9.6% 2.3%  
Communications 17.6% 12.2%  
Financial 6.4% .9%  
Real Estate 12.8% 18.8%  
Natural Resources 15.3% .5%  
Foreign Stocks
MSCI Europe, Australia & Far East (EAFE) ## 16.5% 1.1%  
MSCI EAFE Local Currencies 6.5% -3.0%  
Average Diversified International Stock Fund 17.0% 3.9%
Regional/Specialty Mutual Funds
Europe 18.4% 2.0%  
Japan 7.2% .3%  
Diversified Pacific/Asia except Japan 18.1% 11.1%  
Diversified Emerging Markets 18.5% 10.9%
Alternative Strategies
Average Long-Short Fund 3.4% .1%  
U.S. Bonds
Barclays Capital Intermediate Gov't Bond Index*** 2.1% 6.6%  
Barclays Capital Intermediate Credit Index ð 4.1% 9.1%  
Intermediate Municipal Bond Mutual Funds (National) 3.0% 5.6%  
Short/Intermediate Municipal Bond Mutual Funds (CA) 3.3% 6.4%  
High Yield Bond Mutual Funds 6.4% 10.1%  
Foreign Bonds
Citigroup Non-U.S. World Gov't Bond Index ### 10.5% 6.8%  
J.P. Morgan Emerging Bond Index #### 8.2% 14.3%  
       
* 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 $44.1 billion.  
*** Barclays Capital 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 Barclays Capital 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 $857 million.  
## 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.  
#### J.P. Morgan index of total return of debt instruments issued by 13 emerging markets countries (Argentina, Brazil, and Chile have the highest weightings). Returns are converted to U.S. dollars.  
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