Market Review Second Quarter 2011

Market Review
Second Quarter 2011

Stock returns were generally significantly lower during the second quarter after posting solid gains during the first quarter. Investors focused on disappointing domestic economic data, the disruption to global supply chains caused by the earthquake, tsunami, and nuclear disasters in Japan, the global debt overhang, and challenging geopolitical issues such as unrest in the Middle East and North Africa. Bonds were a safe haven, and 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

U.S. stock returns were essentially flat during the second quarter. In a reversal from the first quarter, investors favored growth stocks over value stocks. The Russell 3000 Growth and Russell 3000 Value rose 0.6 and fell -0.7%, respectively, for the quarter. In addition, large-cap stocks held up better than their small-cap counterparts. The Russell 1000 (large cap) and Russell 2000 (small cap) indexes returned 0.1% and -1.6%, respectively, for the quarter. Finally, defensive sectors such as health care, consumer staples, and utilities were the best performers, gaining 7.1%, 4.7%, and 3.6%, respectively. Economically sensitive sectors such as energy and financials lagged, falling -5.2% and -4.0%, respectively.

International stocks continued to underperform their domestic counterparts due to economic uncertainty and the ongoing sovereign debt issues in peripheral Europe. Recovery efforts following Japan's triple disaster generally halted the previous precipitous decline of the country's economy and financial markets. As in the first quarter, foreign developed countries stocks outperformed emerging markets stocks as concerns about inflation and other macroeconomic issues continued to reduce investors' appetite for risk. The MSCI EAFE Index of developed countries and MSCI Emerging Markets Index gained 1.6% and fell -1.2%, respectively, for U.S. dollar investors. The results across developed regions were typically weak in terms of local currencies, with the exception of Germany and France which exhibited economic strength compared with peripheral Europe. In local currencies, the MSCI Europe Index was about breakeven, the MSCI Japan Index lost about 2.5%, and the MSCI Pacific Ex-Japan Index lost 3.8%.

The dollar weakened during the quarter 2.1% versus 6 currencies tracked by the U.S. Dollar Index (euro, British pound, Canadian dollar, Swiss frank, Swedish krona, and Japanese yen). The greenback also weakened 2.5% versus 25 emerging market currencies tracked by the MSCI EM Currency (USD) Index. For the quarter, currency gains by unhedged U.S. investors significantly boosted foreign returns from generally negative in local currencies to positive in U.S. dollars.

Fixed Income

Fixed income performance was positive across all categories for the quarter. The broad U.S. market, as represented by the Barclays Capital (BarCap) U.S. Aggregate Bond Index, rose 2.3% for the quarter. Weakening stock returns, declining longer-term interest rates, and bond duration drove relative performance more than quality (or the lack thereof). The Barcap Long Government Index and Barcap 1-3 Year Government Index returned 3.3% and 0.8%, respectively. Long and short-term credit indices reflected similar results. In contrast to recent quarters, the BarCap U.S. Corporate High Yield Index earned 1.1%, reflecting the stalling global economic recovery. Inflation fears also drove performance; the Barcap U.S. Treasury Inflation Note Index rose 3.7% for the quarter. Foreign bonds generally outperformed their domestic counterparts due to significant currency gains. The Citigroup Non-U.S. World Government Bond Index of unhedged performance was up 3.7% for the quarter.

Second Quarter 2011 and Six Months Year-to-Date
Table of Stock and Bond Returns
			Period Return to 6/30/11 *
			Second Quarter	6 Months Ending 6/30/11
U.S. Stocks
	S&P 500 Index**		0.1%	6.0%
	Average Diversified U.S. Equity Mutual Fund		-0.3%	6.3%
	Russell 2000 Index #		-1.6%	6.2%

	Sector Mutual Funds
		Technology	-1.9%	3.9%
		Health	7.1%	15.1%
		Communications	0.6%	5.9%
		Financial	-4.0%	-1.3%
		Real Estate	3.5%	9.7%
		Natural Resources	-5.2%	1.8%

Foreign Stocks
	MSCI Europe, Australasia & Far East (EAFE) Index ##		1.6%	5.0%
	MSCI EAFE Local Currencies		-0.8%	0.2%
	Average Diversified International Stock Mutual Fund		1.2%	4.3%

	Regional/Specialty Mutual Funds
		Europe	1.0%	6.3%
		Japan	2.2%	-2.6%
		Diversified Pacific/Asia except Japan	0.3%	-0.4%
		Diversified Emerging Markets	-0.9%	-0.4%

Alternative Strategies
	Average Long-Short Fund		-0.6%	1.1%
	Average Market Neutral Mutual Fund		0.8%	1.3%

U.S. Bonds
	Barclays Capital Intermediate Gov't Bond Index***		2.1%	2.1%
	Barclays Capital Intermediate Credit Index ð		2.2%	3.2%
	Intermediate Municipal Bond Mutual Funds (National)		3.1%	3.7%
	Intermediate Municipal Bond Mutual Funds (CA)		3.2%	3.6%
	Inflation-Protected Funds		3.0%	5.0%
	Bank Loans Funds		0.2%	2.7%
	High Yield Bond Mutual Funds		0.6%	4.3%

Foreign Bonds
	Citigroup Non-U.S. World Gov't Bond Index ###		3.7%	4.7%
	J.P. Morgan Emerging Bond Index ####		3.9%	4.8%

*	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 $49.2 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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