World Markets Review November 2007 Ann Duncan, Portfolio Manager, Balanced Funds, provides analysis and reporting on the U.S. and international markets. Now you can benefit from Russell's extensive research expertise, with timely commentary on the U.S. economy and equity markets, bond markets, and international markets. U.S. Economy: Great News Behind — Greater Uncertainty Ahead Amid the series of mostly grim data points in November, third quarter gross domestic product (GDP) growth was revised up from the initial 3.9% estimate to an even more robust 4.9%, the economy's best pace in four years. Stronger exports and increased inventory investment accounted for the adjustment. Exports, boosted by still strong overseas demand and the weak dollar, will continue to aid the U.S. economy. But with consumer confidence and the broader business climate at risk from the ongoing housing slump, subprime mortgage crisis, financials sector turmoil and soaring oil prices, GDP growth is expected to slow sharply in the fourth quarter and into 2008. Although Federal Reserve Bank Chairman Ben Bernanke stated the "positive news is that we are confronting and managing these challenges against the backdrop of a strong global economy," November brought forecasts of slower growth in Europe and other overseas markets. Housing indicators continued to alarm. New home sales fell more than 20% in October over year-ago levels. The median price of new homes fell 13%, the biggest annual drop since 1970. Mortgage defaults and foreclosures rose. Morgan Stanley was the latest investment bank to dismiss a key executive in the wake of huge subprime mortgage-related losses. November's resurgence of risk aversion intensified the credit crunch that began in the summer. Tighter lending standards and contraction in the commercial paper market raised concerns that companies will be forced to curb or delay expansion plans. Wariness on the part of lenders is always prudent (and might have prevented much of the subprime crisis), but now may be cutting off healthy companies from access to loans. These concerns brought assurances from Fed officials that monetary policy would be "pragmatic and flexible" to ease the credit crunch and ward off recession. While rising food and energy costs and the even weaker dollar raised inflation pressures, core inflation (excluding food and energy) remained below 2% in October, giving the Fed more leeway to trim interest rates again in December. The prospects of lower rates and news of Treasury Secretary Henry Paulson's joint government/private sector plan for a temporary freeze of interest rates for some subprime borrowers greatly improved investor sentiment in the U.S. and around the world near month-end. After an extended period of below-normal volatility, the second half of 2007 has seen volatility and risk aversion return to the markets with a vengeance. Although equity valuations overall appear fairly attractive relative to historical averages, and the economy contains areas of strength, market volatility will remain high as investors grapple with uncertain credit, housing and mortgage-related concerns and fears of recession. In this environment, focus on higher quality companies with better abilities to withstand an economic slowdown is warranted. Index Returns   Month Ending November 2007   Year-To-Date 2007 Russell 1000® Index   -4.26   6.47 Russell 2000® Index   -7.18   -1.50 Russell 2500™ Index   -6.13   2.01 Russell 1000® Growth Index   -3.68   12.22 Russell 1000® Value Index   -4.89   0.80 Russell 2000® Growth Index   -6.91   6.38 Russell 2000® Value Index   -7.49   -9.01 Lehman Brothers Aggregate Bond Index   1.80   6.67 MSCI EAFE Index Gross (USD)   -3.26   14.20 MSCI Emerging Markets Index Gross (USD)   -7.08   39.28 U.S. Equities: The Pain Spreads Beyond Financials The renewed credit crunch and rising concerns of a U.S. recession pummeled stocks through much of November. But suggestions of a December Fed interest rate cut, news of a government plan to stem foreclosures and Abu Dhabi Investment Fund's $7.5 billion injection into Citigroup provided a much needed boost to investor sentiment in the last week. However, even with a strong rebound in the U.S., the Russell 3000® Index ended November down 4.50%. Large cap stocks held up considerably better than small caps, and the classically defensive sectors of health care and consumer staples managed modest gains. Utilities also held up relatively well. Small caps were hampered by big sell-offs among retail and other consumer discretionary stocks. Despite month-end rallies, financials, notably Citigroup, Morgan Stanley and Freddie Mac, fell furthest in November. In a turnaround from recent trends, technology stocks also sold off due to increased evidence of slowdowns in the U.S. and abroad. Cisco, Microsoft and Dell were among the largest detractors in the Russell 1000® Growth Index. Despite technology's reversal, growth stocks overall fared better than value, with support from health care stocks and lower exposure to financials. Consumer staples such as PepsiCo and Colgate also supported the large cap growth performance. U.S. Bonds: Further Credit Woes Boost Treasuries (Performance is stated in total returns, unless otherwise noted) Rising credit concerns, greater risk aversion and the desire for safety pushed Treasury prices up and yields down significantly in November. The 10-year yield fell from 4.35% to 3.94%, its lowest level since mid-2005. The two-year yield fell from 3.76% at the start of November to 3.05% at the end, helped by increasing odds of another federal funds rate cut. Treasuries outperformed all major broad market sectors on an equivalent-duration basis. The Lehman Brothers Aggregate Bond Index returned 1.80%, compared with 3.07% for Treasuries. Investment-grade corporate bonds returned 0.60%, with the retailers and banking sub-sectors among the worst performers on continued concerns about subprime mortgages and their expected impact on consumer spending. Securitized bonds (mortgage-backed, asset-backed and collateralized mortgage-backed) returned 1.58%. Outside of the index, high yield and emerging market debt fared poorly in the environment of rising risk aversion. High yield lost 2.17%, pushed down by the financial institutions and home construction sub-sectors. Emerging market debt held up better, returning -0.66%. Non-U.S. Markets: Stagflation Fears in Europe (Performance is in U.S. dollars, unless otherwise noted) As in the U.S., overseas markets experienced tremendous volatility, falling steadily through much of November and then rallying broadly near month-end. Concerns of a U.S. slowdown, global credit market turmoil and soaring oil prices all weighed on investor sentiment. The MSCI EAFE Index lost 3.26% in U.S. dollars, with a larger local currency loss (-4.09%). Growth stocks fared better than value stocks, with defensive sectors performing best. Utilities, health care and consumer staples all registered positive gains. The more cyclical sectors performed poorly, led by industrials. Financials faced continued pressure and was the worst performing sector in November. Several large banks adjusted down the value of certain mortgage- and credit-related assets, and investors feared there were more losses to come. Regional performance trends favored Japan, down 1.83%, because of currency gains, as the yen rose almost 4% against the U.S. dollar. Despite Japan's fairly strong 2.6% annual GDP growth in the September quarter, uncertainty over the outlook for the U.S. checked optimism toward Japanese stocks. After strong performance for much of the year, particularly in Hong Kong and Australia, the Pacific Basin ex-Japan was the worst performing region, down 6.56%. Profit-taking and a sharp reversal in the Australian dollar contributed to the region's poor performance. Europe fell 3.18% with much of the euro's rise against the U.S. dollar offset by a fall in the British pound. Continental Europe fared better than the U.K., which showed signs of slowdowns in its service and housing sectors due to the global credit crunch. Just after month-end, the Bank of England lowered its key interest rate to 5.5%. Across the Channel, with euro zone inflation nearing its highest level in six years, the European Central Bank held rates steady. Emerging Markets: Decoupling Debunked (Performance is in U.S. dollars, unless otherwise noted) After a strong run, emerging markets proved not to be immune to a downturn in the U.S. economy. Prospects of an additional U.S. interest rate cut in December and further downward pressure on the dollar also weighed on the outlook for emerging markets exports to the United States. Health care was the best performing sector, while the more cyclical technology and industrials sectors fell sharply in November. Europe, the Middle East and Africa (EMEA) was the best performing region, down 2.85%. Russia advanced 1.01% after lagging well behind other emerging markets in 2007. Latin America fell 5.7%, with Mexico and Brazil faring better than Argentina. Asia fell 9.38%, with China down over 13% on profit-taking and concerns that its economy was overheating. Korea and Taiwan also suffered large gains, while India held up relatively well. RUSSELL INVESTMENTS Copyright © Russell Investments 2007. All rights reserved. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Russell Investments is the owner of the trademarks, service marks, and copyrights related to its indexes. The Russell logo is a trademark and service mark of Russell Investments. Unless otherwise noted, the source in this material is Russell. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. Bond investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse repurchase transaction risk. Greater risk is inherent in portfolios that invest primarily in high-yield bonds. They are subject to additional risks, such as limited liquidity and increased volatility. Large capitalization (large cap) investments involve stocks of companies generally having a market capitalization between $10 and $200 billion. The value of securities will rise and fall in response to the activities of the company that issued them, general market conditions and/or economic conditions. Small capitalization (small cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than $2 billion) than larger company stocks (large cap). Small cap investments are subject to considerable price fluctuations and are more volatile than large company stocks. Investors should consider the additional risks involved in small cap investments. Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short term or have grown consistently over the long term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors' perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments. Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or, such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments. Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Fund investments in non-U.S. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems, which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer established non-U.S. markets. Non-U.S. markets entail different risks than those typically associated with U.S. markets, including currency fluctuations, political and economic instability, accounting changes, and foreign taxation. Securities may be less liquid and more volatile. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Index performance is not indicative of the performance of any specific investment and is provided for general comparison purposes only. Index return information is provided by vendors and, although deemed reliable, is not guaranteed by Russell or its affiliates. Federal funds rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. Gross Domestic Product (GDP) is the market value of the goods and services produced by labor and property in the United States. Lehman Brothers Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the "MSCI Parties") expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in 21 developed market countries in Europe, Australasia, and the Far East. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, representative of the U.S. large capitalization securities market. Russell 1000® Growth Index measures the performance of those Russell 1000® Index securities with higher price-to-book ratios and higher forecasted growth values, representative of U.S. securities exhibiting growth characteristics. Russell 1000® Value Index measures the performance of those Russell 1000® Index securities with lower price-to-book ratios and lower forecasted growth values, representative of U.S. securities exhibiting value characteristics. Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, representative of the U.S. small capitalization securities market. Russell 2000® Growth Index measures the performance of those Russell 2000® Index securities with higher price-to-book ratios and higher forecasted growth values, representative of U.S. securities exhibiting growth characteristics. Russell 2000® Value Index measures the performance of those Russell 2000® Index securities with lower price-to-book ratios and lower forecasted growth values, representative of U.S. securities exhibiting value characteristics. Russell 2500™ Index measures the performance of the 2,500 smallest companies in the Russell 3000® Index, representative of the U.S. small to medium-small capitalization securities market. Russell 3000® Index measures the performance of the 3,000 largest U.S. securities based on total market capitalization. Treasury Bills (T-bills) are short-term debt securities issued by the U.S. government with maturities of usually one year or less. Securities products and services offered through Russell Financial Services, Inc. (formerly Russell Fund Distributors, Inc.), member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. First used December 2007 RFD 07-7303			Investment PRODUCTS LifePoints Funds Russell Funds Separate Accounts   Printer friendly version of this page Send feedback or comments Site Search

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