Fourth Quarter 2010
Market Review

Stocks posted strong gains during the fourth quarter as investors digested economic data, the Federal Reserve's plan to energize the U.S. economy through another series of bond purchases, and agreement between the President and Congress to extend the Bush-era tax cuts for two years and to reduce payroll taxes in 2011. Fixed income returns for U.S., foreign developed countries, and emerging markets were negative 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 and market capitalizations posted gains for the fourth quarter. Investors favored growth stocks over value stocks. Leadership across capitalizations changed during the period, with small-cap stocks besting their large-cap counterparts by a wide margin. The Russell 2000 (small cap) and Russell 1000 (large cap) indexes returned 16.3% and 11.2%, respectively, for the quarter. Economically sensitive sectors such as energy and materials were the best performers, gaining 22.3% and 19.4%, respectively. Defensive sectors such as utilities and health care were among the laggards, adding only 2.2% and 5.1%, respectively.

International stocks were solid but underperformed their domestic counterparts as concerns over sovereign debt and the potential for contagion in Europe tempered investors' appetite for risk. Emerging markets stocks outperformed foreign developed countries stocks for the eighth consecutive quarter. The MSCI Emerging Markets Index and the MSCI EAFE Index of developed countries gained 7.3% and 6.6%, respectively, for the quarter. The gains across developed regions were somewhat uneven, reflecting investors' risk concerns. The MSCI Japan, the MSCI AC Asia Ex-Japan, and the MSCI Europe Index rose 12.1%, 6.7%, and 4.5% for U.S. dollar investors, respectively, for the quarter.

The dollar strengthened during the fourth quarter 1.5% versus 6 currencies tracked by the U.S. Dollar Index. However, there were mixed results for the dollar against individual countries in the index. Specifically, the dollar rose against the euro and British pound; and the dollar fell against the Canadian dollar, Japanese yen, Swiss frank, and Swedish krona. Finally, the dollar declined -7.9% 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, especially in emerging markets and Japan.

Fixed Income Review

Fixed income performance was generally negative for the quarter, although high yield bonds and bank loans were in the black. The broad market, as represented by the Barclays Capital (BarCap) U.S. Aggregate Bond Index, declined -1.3% for the quarter. The primary driver of performance was duration, with the longest-dated securities generally experiencing the steepest declines. Quality (or the lack thereof) also continued to drive relative performance. The BarCap Aggregate U.S. Treasury Index and the BarCap U.S. Corporate High Yield Index returned -2.6% and 3.2%, respectively.

Foreign bonds modestly underperformed their domestic counterparts, largely weighed down by European securities. The BarCap Global Aggregate ex U.S. Index fell -1.3% and the Morningstar Eurozone Bond Index declined -5.2% for the quarter.

Fourth Quarter 2010 and Twelve Months Year-to-Date
Table of Stock and Bond Returns
     

Period Return to 12/31/10 *

 
      Fourth
Quarter 		  12 Months Ending 12/31/10
U.S. Stocks
S&P 500 Index** 10.8% 15.1%
Average Diversified U.S. Equity Mutual Fund 12.5% 18.8%
Russell 2000 Index # 16.3% 26.9%
Sector Mutual Funds
Technology 12.5% 20.8%
Health 5.7% 8.2%
Communications 6.7% 19.1%
Financial 10.0% 10.9%
Real Estate 6.9% 27.0%
Natural Resources 17.8% 18.2%
Foreign Stocks
MSCI Europe, Australia & Far East (EAFE) ## 6.6% 7.8%
MSCI EAFE Local Currencies 5.2% 2.1%
Average Diversified International Stock Fund 7.7% 11.9%
Regional/Specialty Mutual Funds
Europe 7.1% 9.8%  
Japan 12.8% 13.1%  
Diversified Pacific/Asia except Japan 9.1% 16.5%
Diversified Emerging Markets 7.2% 19.0%
Alternative Strategies
Average Long-Short Fund 4.4% 4.2%
U.S. Bonds
Barclays Capital Intermediate Gov't Bond Index*** -1.6% 5.0%
Barclays Capital Intermediate Credit Index ð -1.2% 7.8%  
Intermediate Municipal Bond Mutual Funds (National) -3.3% 2.0%
Short/Intermediate Municipal Bond Mutual Funds (CA) -4.0% 2.1%
High Yield Bond Mutual Funds 3.5% 1.0%
Foreign Bonds
Citigroup Non-U.S. World Gov't Bond Index ### -1.5% 5.2%
J.P. Morgan Emerging Bond Index #### -1.8% 12.2%
       
* 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 $48.2 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 $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.  
#### 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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