Market Review
First Quarter 2011

Stocks continued to post strong gains during the first quarter as investors focused on improving corporate income over macroeconomic and geopolitical issues such as unrest in the Middle East and North Africa and the earthquake, tsunami, and nuclear disasters in Japan. Fixed income returns for U.S., foreign developed countries, and emerging markets were generally positive for U.S. dollar investors 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 first quarter. Investors marginally favored value stocks over growth stocks. The Russell 3000 Value and Russell 3000 Growth rose 6.5 and 6.3%, respectively, for the quarter. Small-cap stocks continued to outperform their large-cap counterparts, but by a significantly smaller margin. The Russell 2000 (small cap) and Russell 1000 (large cap) indexes returned 7.9% and 6.2%, respectively, for the quarter. Although small-caps typically outperform large caps coming out of recessions, the duration of the current performance edge has been surprising. Since the equity market trough on March 9, 2009, small-cap stocks have outperformed large-cap stocks by about 30 percentage points over the roughly 25-month period. Finally, economically sensitive sectors such as energy and industrials were the best performers, gaining 16.9% and 8.8%, respectively. Defensive sectors such as consumer staples and utilities lagged, adding only 3.1% and 4.1%, respectively.

International stocks were solid but underperformed their domestic counterparts due to concerns over factory closures and component shortages following Japan's triple disaster and the ongoing sovereign debt issues in Europe. In a reversal from the last eight quarters, foreign developed countries stocks outperformed emerging markets stocks as concerns about inflation and other macroeconomic issues reduced investors' appetite for risk. The MSCI EAFE Index of developed countries and MSCI Emerging Markets Index gained 3.4% and 2.1%, respectively, for U.S. dollar investors for the quarter. The gains across developed regions were somewhat uneven, reflecting investors' risk concerns. The MSCI Japan Index fell 4.9%, and the MSCI AC Asia Ex-Japan Index and MSCI Europe Index rose 1.2% and 6.5%, respectively, for U.S. dollar investors for the quarter.

The dollar weakened during the first quarter 3.8% versus 6 currencies tracked by the U.S. Dollar Index. Specifically, the dollar fell against the euro, British pound, Canadian dollar, Swiss frank, and Swedish krona but rose against the Japanese yen. The dollar also weakened 2.4% versus 25 emerging market currencies tracked by the MSCI EM Currency (USD) Index. For the quarter, currency gains by unhedged U.S. investors boosted foreign returns, Japan being the only major exception.

Fixed Income

Fixed income performance was generally unexciting but positive for the quarter. The broad U.S. market, as represented by the Barclays Capital (BarCap) U.S. Aggregate Bond Index, rose 0.4% for the quarter. Quality (or the lack thereof) also continued to drive relative performance. The performance of U.S. government bonds was breakeven, whereas corporate bonds, and particularly high yield bonds, benefited from healthy corporate profit margins reflecting the continuing global economic recovery. The Barcap Intermediate Credit Index and BarCap U.S. Corporate High Yield Index increased 1.0% and 3.9%, respectively, for the quarter. Inflation fears also drove performance; the Barcap U.S. Treasury Inflation Note Index rose 2.1% for the quarter. Foreign bonds generally outperformed their domestic counterparts. The BarCap Global Aggregate ex-U.S. Index was up 1.8% for the quarter, aided by significant currency gains.

First Quarter 2011 and Twelve Months Year-to-Date
Table of Stock and Bond Returns
     

Period Return to 3/31/11 *

 
      First
Quarter 		  12 Months Ending 3/31/11
U.S. Stocks
S&P 500 Index** 5.9% 15.7%
Average Diversified U.S. Equity Mutual Fund 6.7% 19.3%
Russell 2000 Index # 7.9% 25.8%
Sector Mutual Funds
Technology 6.0% 23.2%
Health 7.5% 9.5%
Communications 5.6% 24.2%
Financial 3.1% 5.7%
Real Estate 6.1% 23.2%
Natural Resources 7.6% 25.8%
Foreign Stocks
MSCI Europe, Australasia & Far East (EAFE) Index ## 3.4% 10.4%
MSCI EAFE Local Currencies 1.0% 1.5%
Average Diversified International Stock Mutual Fund 3.0% 13.3%
Regional/Specialty Mutual Funds
Europe 5.3% 14.7%  
Japan -5.1% -0.2%  
Diversified Pacific/Asia except Japan -1.6% 13.6%
Diversified Emerging Markets 0.4% 16.6%
Alternative Strategies
Average Long-Short Fund 1.7% 5.0%
U.S. Bonds
Barclays Capital Intermediate Gov't Bond Index*** 0.0% 3.8%
Barclays Capital Intermediate Credit Index ð 1.0% 6.3%  
Intermediate Municipal Bond Mutual Funds (National) 0.5% 1.8%
Intermediate Municipal Bond Mutual Funds (CA) 0.3% 1.3%
Inflation-Protected Funds 2.0% 7.3%
Bank Loans Funds 2.5% 7.7%
High Yield Bond Mutual Funds 3.9% 14.3%
Foreign Bonds
Citigroup Non-U.S. World Gov't Bond Index ### 1.0% 8.5%
J.P. Morgan Emerging Bond Index #### 0.9% 8.6%
       
* 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 $50.2 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 $1.1 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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