Market Review
Fourth Quarter 2011

The fourth quarter was dominated by macroeconomic news with the primary focus on the ongoing sovereign debt crisis in Europe. After a dismal third quarter, capital markets rallied amidst high levels of volatility and notwithstanding considerable uncertainty. U.S. stocks provided double digit returns for the quarter and foreign stocks returned to positive territory. U.S. bonds earned low single digit returns. Foreign fixed income returns were mixed; developed countries bonds were about flat, but emerging markets bonds generated solid returns. The U.S. dollar strengthened against most developed market currencies, decreasing returns of foreign stocks and bonds for unhedged U.S. dollar investors.

Equity Review

U.S. stocks posted strong gains across all asset classes during the fourth quarter. Investors became more risk tolerant, preferring small-cap stocks over their large-cap counterparts. The Russell 2000 (small cap) and Russell 1000 (large cap) indexes returned 15.5% and 11.8%, respectively, for the quarter. Value stocks outperformed growth stocks. The Russell 3000 Value and Russell 3000 Growth indexes rose 13.3% and 10.9%, respectively, for the quarter. Finally, economically sensitive sectors such as industrials, energy, and consumer cyclical were the best performers, gaining 14.2%, 14.0%, and 11.1%, respectively. Defensive sectors such as utilities, health, and technology provided very good but lower returns, adding 8.3%, 8.6% and 6.2%, respectively.

International stocks continued to underperform their domestic counterparts due to economic uncertainty, the ongoing sovereign debt issues in peripheral Europe, and the strengthening dollar. In contrast to the first three quarters, emerging markets stocks outperformed foreign developed countries stocks as a rally in commodities prices and other macroeconomic issues increased investors' appetite for the risky but enticing emerging market's growth story. The MSCI Emerging Markets Index and the MSCI EAFE Index of developed countries gained 4.4% and 3.3%, respectively, for the quarter, for U.S. dollar investors. The results across most developed regions varied. In local currencies, the MSCI Europe Index rose 7.5%, the MSCI Pacific Ex-Japan Index gained 1.4%, but the MSCI Japan Index declined 4.2%.

As noted, the dollar generally strengthened during the quarter. It rose 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 strengthened a much lower .3% versus 21 emerging market currencies tracked by the MSCI EM Currency (USD) Index.

Fixed Income

Fixed income performance was generally positive for the quarter, although foreign developed countries bonds were minimally in the red for unhedged U.S. dollar investors. The broad U.S. market, as represented by the Barclays Capital (BarCap) U.S. Aggregate Bond Index, rose 1.1% for the quarter. Quality (namely, the lack thereof) drove relative performance. Corporate bonds, and particularly high yield bonds, outperformed U.S. government bonds. The BarCap U.S. Corporate High Yield Index and the BarCap Intermediate-Term Treasury Index returned 6.5% and .7%, respectively, for the quarter. Inflation fears also drove performance; the Barcap U.S. Treasury Inflation Note Index rose 2.7% for the quarter. Foreign bonds generally underperformed their domestic counterparts. The BarCap Global Aggregate ex-U.S. Index returned -.4% for the quarter.

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

Period Return to 12/31/11 *

 
      Fourth
Quarter 		  12 Months Ending 12/31/11
U.S. Stocks
S&P 500 Index** 11.8% 2.1%
Average Diversified U.S. Equity Mutual Fund 11.8% -2.5%
Russell 2000 Index # 15.5% -4.2%
Sector Mutual Funds
Technology 6.2% -7.6%
Health 8.8% 7.7%
Communications 6.4% -5.3%
Financial 9.9% -15.1%
Real Estate 14.8% 7.5%
Natural Resources 11.0% -14.0%
Foreign Stocks
MSCI Europe, Australasia & Far East (EAFE) Index ## 3.3% -12.1%
MSCI EAFE Local Currencies 4.0% -12.1%
Average Diversified International Stock Mutual Fund 4.1% -13.6%
Regional/Specialty Mutual Funds
Europe 4.4% -15.2%  
Japan -3.3% -13.5%  
Diversified Pacific/Asia except Japan -.7% -21.0%
Diversified Emerging Markets 4.2% -19.9%
Alternative Strategies
Average Long-Short Fund 4.2% -2.8%
Average Market Neutral Mutual Fund .3% -.3%
U.S. Bonds
Barclays Capital Intermediate Gov't Bond Index*** .7% 6.1%
Barclays Capital Intermediate Credit Index ð 1.1% 5.4%  
Intermediate Municipal Bond Mutual Funds (National) 2.2% 9.0%
Intermediate Municipal Bond Mutual Funds (CA) 2.2% 8.7%
High Yield Bond Mutual Funds 5.6% 2.8%
Foreign Bonds
Citigroup Non-U.S. World Gov't Bond Index ### -.5% 5.2%
J.P. Morgan Emerging Bond Index #### 4.7% 7.4%
Emerging Market Bond Mutual Funds 3.1% 2.0%
       
* 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 $49.1 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 $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 mostly in dollars by 13 emerging markets countries (Argentina, Brazil, and Chile have the highest weightings). Returns are converted to U.S. dollars.  
   
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