World markets review First quarter 2009 Aran Murphy, Research Analyst for Russell Investment Services, 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. Overview: From the freeze to the thaw? Asset values, which began sliding in earnest in late 2008, continued to fall during first quarter 2009. On the positive side, the end of March posted a reversal for many indexes that clawed back territory lost that month, a trend which - if continued - would be a welcome change for investors. Stabilization of developed market bank balance sheets remains a top concern across all sectors, although credit spreads, which have been extremely wide, appear to be narrowing. U.S. economy: The commerce clause ascendant Talks of stress tests and bank nationalization spooked those investors considering returning to equities. Both Treasury Secretary Geithner and Federal Reserve Chairman Bernanke asked Congress to extend their institutional powers, allowing for the seizing of failing financial companies in a way similar to what regulators can do for failing banks. Even investors taking comfort in heavy government intervention had reason to approach market re-entry with caution. The specifics of government actions remain uncertain as does the financial status of institutions on government life-support, such as AIG. In March, Treasury Secretary Geithner released the awaited details of a mixed private and public toxic asset purchase plan, the Public-Private Investment Partnership (PPIP). Critics claim that the PPIP is similar to the plan former Treasury Secretary Paulson put forward last fall and then abandoned. Like Paulson's plan, Geithner's PPIP does not resolve the problem of pricing the illiquid securities weighing down the balance sheets of U.S. financial institutions. Nevertheless, the market's moves following the Treasury announcements were positive. The first two months of 2009 saw brutal downswings in real estate valuations as, like equities, the sector responded to credit and employment developments. The FTSE NAREIT Equity REITs Index generated a -31.87% total return for first quarter 2009, though it ended March on more positive footing because several REITs made progress raising capital to address their borrowing needs. The sector also benefited because the spread between REIT dividend yields and 10-year U.S. Treasury is over 7%, compared to a historical average of about 1%. Index returns   Month ending March 2009   Quarter ending March 2009   Year to date 2009 Russell 1000® Index   8.75   -10.45   -10.45 Russell 2000® Index   8.93   -14.95   -14.95 Russell 2500™ Index   9.13   -11.43   -11.43 Russell 1000® Growth Index   8.92   -4.12   -4.12 Russell 1000® Value Index   8.55   -16.77   -16.77 Russell 2000® Growth Index   8.98   -9.74   -9.74 Russell 2000® Value Index   8.88   -19.64   -19.64 Barclays Capital U.S. Aggregate Bond Index   1.39   0.12   0.12 Russell Global Developed ex-U.S. Index (USD)   6.80   -12.30   -12.30 MSCI EAFE Index Gross (USD)   6.39   -13.85   -13.85 Russell Emerging Markets Index (USD)   14.26   0.31   0.31 MSCI Emerging Markets Gross (USD)   14.38   1.02   1.02 U.S. stocks: A standing eight count Knocked to the canvas the first two months of the quarter, U.S. equities regained their feet before quarter's end. Financial services and small cap stocks were the hardest hit at first, with the Russell 2000® Index giving up 14.95% and the Russell 1000® Index losing 10.45%. At the end of February came an announcement that fourth quarter 2008 gross domestic product (GDP) experienced its largest decline since 1982, followed by March announcements that unemployment had increased to 8.1%, the highest since 1983, and orders at U.S. factories dropped for a sixth month. GE's credit rating was downgraded, and GM and Chrysler discussed bankruptcy options with the government. From these blows the U.S. stock market climbed the ropes to post three straight weeks of gains through the end of March. The markets improved when the three largest U.S. banks, Bank of America, JPMorgan Chase and Wachovia, announced they'd turned a profit. Also consumer sentiment climbed to a higher-than-estimated 56.6 from 56.3 in February according to the latest Reuters/University of Michigan Survey of Consumers. The market continued to rise when the Fed said it would buy $1 trillion of bonds in a more structured plan to rid banks of toxic assets. In a reversal from the first two months, in March the Russell 3000® Index rose 8.76%, the best monthly rise since 1991. U.S. bonds: A rough quarter (Performance is stated in total returns unless otherwise noted.) Government debt issues had a rough February when U.S. and UK debt auctions saw weak support for long and non-inflation indexed government debt. The disappointing auctions led to a near 1-point increase on the 30-year end of the curve. The poor showings were soon followed by a warmer reception for shorter-dated securities. Overall the yield curve steepened. In late March, the U.S. Treasury Secretary unveiled his PPIP plan to remove toxic assets from the books of the nation's banks. By avoiding outright nationalization of financial institutions and encouraging the participation of private capital, the plan seeks to walk the narrow line between either doing too little or overplaying the government's hand. The PPIP aims to finance as much as $1 trillion in purchases of illiquid real estate assets, using $75-$100 billion of the Treasury's remaining bank-rescue funds. The PPIP will also rely on Federal Reserve financing and Federal Deposit Insurance Corp. debt guarantees. Another policy move to support the markets came when the Federal Reserve announced its intent to buy $300 billion of 2- and 10- year Treasuries over the next six months to increase the size of its expected purchase of agency mortgage-backed securities from $500 billion to $1.25 trillion and to double its purchases of agency debt, from $100 billion to $200 billion. These large moves qualify as quantitative easing, which is different from routine Fed purchases or sale of treasuries to influence the Fed Funds Rate. Quantitative easing will directly support the prices for the assets to be purchased while indirectly increasing the money supply. Non-U.S. stocks: A ray of hope for emerging markets (All returns are in U.S. dollars unless otherwise noted.) In March, many equity indexes around the world followed the U.S. path, regaining much of the losses since January. No new major financial collapses emerged (the exception being the continuing saga of the U.S. auto industry) which may have helped calm global investors. A cautionary note: Recovery in equities, like the one in March, also occurred November into December of 2008. So long as the credit markets remained dysfunctional, apparent improvements in equities may prove to be ephemeral. Troubles in the U.S. continued to cast a cloud over the global equities markets. News of troubled GM, GE, and Chrysler affected international bond holders and shareholders alike. U.S. Treasury Secretary Geithner indicated that some banks in the U.S. would need large amounts of government assistance to survive, and that the $135 billion remaining in bailout money would soon need replenishing. These worries spilled over into European and Asian markets. Stocks in commodity-producing regions made large gains after suggestions that China's four trillion-yuan stimulus plan will boost demand for commodities. The Chinese Shanghai SE Composite Index - the best-performing global index so far in 2009 - advanced to its best "new year" start since 2000 after the government confirmed that 2009 economic growth targets remained attainable, and that new lending had reached record levels. The MSCI Emerging Markets Index Net advanced 0.95% in U.S. dollar terms, largely predicated on the belief that many emerging economies may recover soon. The view is that emerging markets' financial systems are better-capitalized and less leveraged than those of more developed countries. Russia benefited from a resource-driven rally of 5.9% on a low valuation base. Crude oil reached local highs while natural gas margins remain attractive. Brazilian equities (up 12.5%) were also boosted by the more positive news flow on commodities. Poland and Hungary achieved strong returns in March but this was not enough to offset the large falls earlier in the quarter as Poland finished down 31.5%. Investor capital fled eastern European countries in January and February amid fears of default. Non-U.S. bonds: All eyes on U.S. (All returns are in U.S. dollars unless otherwise noted.) Agency bonds, issued by quasi-governmental agencies in the U.S., benefited over the quarter from the U.S. Government's Term Asset-Backed Securities Loan Facility (TALF) program. TALF authorizes taxpayer support of this sector through Treasury purchases. The TALF program focuses on new issues, yet it is nonetheless having an impact in the rest of the asset backed sector. Home equity dragged the sector downward by 11.3%. Russell Investments Copyright© Russell Investments 2009. 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, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ("junk") bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to subprime mortgages. 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. Barclays Capital U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. Consumer Price Index: A measure of inflation in the economy, widely used as a cost-of living benchmark. 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. FTSE NAREIT Equity REITs Index is an index, with dividends reinvested, representative of tax-qualified REITs listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ National Market System. Gross Domestic Product (GDP): The market value of the goods and services produced by labor and property in the United States. 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. Russell Emerging Markets Index measures the performance of emerging market securities in the Russell Global Index, based on market capitalization. The index includes approximately 2,800 securities and covers 20% of the investable global market. Russell Global Developed ex-U.S. Index measures the performance of developed market securities in the Russell Global Index outside of the United States, based on market capitalization. The index includes approximately 4,800 securities and covers 46% of the investable global market. Russell Global Index is constructed to provide a comprehensive and unbiased barometer for the global segment and is completely reconstituted annually to ensure new and growing equities are reflected. 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 April 2009 RFS 09-1708			Past commentary 4rd quarter 2008   Investment products LifePoints funds Russell funds Separate accounts   Printer friendly version of this page Send feedback or comments Site Search

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