The U.S. equity markets moved higher during the fourth quarter of 2009 with the S&P 500 Index up 6.0%. The positive equity results were largely a function of continued improvements in economic data, easing credit markets and better-than-expected corporate profitability. All of this has been supported by aggressive global monetary and fiscal policy with G-20 policy rates at very low levels. On the economic front, several indicators continued to point to recovery ranging from the ISM Manufacturing Index to Gross Domestic Product, which rose at an annual rate of 2.59% in the third quarter. But, the most positive news came on the jobs front in December when the Bureau of Labor Services reported that the U.S. cut only 11,000 jobs in November, a number significantly better than economists were predicting. Market participants have been very critical of the employment situation in the U.S. and fear that the economic recovery cannot be sustained without a meaningful improvement in employment. Equity markets were also supported by continued strength in emerging economies, which have continued to post solid results. The most apparent weakness came from small businesses. According to the National Federation of Independent Business, small business sales expectations and job openings continued to look bleak. Small businesses account for a significant portion of the U.S. economy and it will be imperative that their prospects brighten in order to sustain the improving economic growth trajectory.

In terms of market capitalization, large cap stocks slightly edged out mid caps returning 6.1% and 5.9% respectively. Small caps trailed returning 3.9%. With the prospects of a potentially more robust economic recovery taking place outside of the U.S., investors favored large, multinational firms with sales exposure to foreign markets. Additionally growth stocks outperformed value stocks which can likely be attributed to investors shifting from a pro-cyclical posture to more of a quality-growth bias. From a sector perspective, technology stocks were the best performing group in the fourth quarter, up 10.7%, and also posted the best returns of 2009. This was driven by robust corporate profitability and investor expectations that demand for technology in 2010 could be quite robust. These expectations are based on the belief that a PC cycle could drive meaningful demand for hardware and semiconductor chips while long-term secular trends such as cloud computing andthe proliferation of smart phones exhibited strength. Elsewhere, the health care sector posted strong results returning 9.1%. Health care was boosted as the government released details surrounding health care reform, which was not as bad as many had feared. Conversely, the financials were the worst performing group down 3.3%. Concerns surrounding potentially adverse future regulation and the prospect of higher future interest rates weighed on the group.

International developed equity markets, as measured by the MSCI EAFE Index, returned 2.2% in the fourth quarter of 2009, trailing the 6.0% return of the S&P 500 Index. Most sectors generated positive returns, led by the materials sector. In a reversal from last quarter, the financial sector detracted the most, due primarily to diversified financials and banks. Among countries, those that had larger exposure to the materials sector generally performed well. Most countries in the MSCI EAFE Index posted positive returns. Greece detracted the most from performance due to concern regarding the country's sovereign debt. During prior quarters this year, foreign small-capitalization companies in developed equity markets outpaced their larger-cap counterparts; however, during the fourth quarter, foreign small-capitalization companies were down -1.0%, trailing large-cap stocks. During the quarter, the U.S. dollar strengthened against most major foreign currencies, detracting returns for U.S.-based investors.

Emerging markets equities continued to rally through the fourth quarter, capping the best calendar year performance for the MSCI Emerging Markets Index in the last 20 years. The benchmark returned 8.5% for the quarter and just shy of 80% for the year. Emerging market currencies were collectively stronger than the US dollar again in the fourth quarter, but the currency component of total return (approximately 16%) was lower in this quarter than in the third quarter. Of the three main geographic regions, both Latin America and Emerging Europe, Middle East, Africa (EMEA) outperformed during the quarter. Latin America was led by Chile, Brazil, and Mexico which all returned at least 13% during the quarter. Mexico had lagged for most of the year but outperformed in the fourth quarter as investors became more optimistic about economic recovery both in Mexico and the U.S. Among EMEA equities, Israel and Poland both delivered low double-digit returns and helped boost the performance of the EMEA region overall. Emerging Asia delivered a better than 5% return during the quarter but lagged the broad EM benchmark due to sub par returns from India, Indonesia, and South Korea. Among individual sectors, there was no discernable macro economic pattern to outperforming sectors as both cyclical (materials, discretionary) and non-cyclical sectors (health care, staples) outperformed.

Investment grade bond prices rose in the fourth quarter of 2009 as corporate bonds and other types of credit continued their recent rally. Corporate bonds outpaced similar-duration Treasuries by nearly 4%. Corporate bonds issued by banks and other financials outperformed corporate bonds issued by industrials and utilities. Market conditions improved in the quarter because of government support, improved investor willingness to lend, and better economic data. Asset-backed securities and commercial mortgage-backed securities gained as a result of government programs that were designed to stimulate these markets. However, government bond prices fell in the fourth quarter of 2009. Longer-dated Treasury prices fell as the economic outlook improved, and this caused the yield curve to steepen. Agency guaranteed mortgage-backed securities outperformed Treasuries as a result of the Federal Reserve’s direct buying program. Treasury Inflation Protected Securities (TIPS) outperformed nominal Treasuries as long-term inflation expectations increased while real yields fell.

The high yield market, as measured by the BofA U.S. High Yield Constrained Index, rose 6.0% during the fourth quarter. The market rally experienced in the third quarter continued into the fourth aided by strong inflows against relatively poor liquidity, successful distressed debt exchanges, and an increased number of ratings agency upgrades. Additional factors that aided the market were better than anticipated earnings from the auto, publishing, and technology industries; an increased number of IPO's which allowed some issuers to refinance their outstanding debt; and Moody's* forecast of a significant decline in the default rate during 2010. Spreads continued to decrease at a relatively rapid pace throughout the period as technical conditions remained favorable and it became more transparent that the fundamentals of the market had not deteriorated as badly as first feared earlier in the year. As a result the lower rated CCC-to-C sector strongly outperformed the broader market. This trend continued throughout the period and was bolstered by an apparent peaking of the default rate and the rapid descent in the number of distressed credits in the market.

Past performance is no guarantee of future results.