January 2009 Investment Report

Market sentiment is still negative …

January experienced a return to negative market sentiment with more bad news from the financial sector and more indications that distress will be an enduring condition of the economy. All major domestic and international equity markets declined, and the U.S. equity markets experienced the worst January performance ever. At its January meeting, the Federal Reserve projected a deep contraction in Gross Domestic Product (GDP) in the first half of 2009 with slow growth in the second half of the year. Amidst these gloomy reports, the U.S. inaugurated its 44th president, Barack Obama, who made recovery of the economy the top priority of his incoming administration.

… as a result of continuing economic woes.

The Department of Labor’s initial estimate for the fourth quarter 2008 Gross Domestic Product revealed a decline of 3.8% and provided official confirmation of the obvious fact that the economy is in recession, which is defined as two back-to-back quarters of negative growth. The non-farm payroll report showed job losses (524,000) for the 12th straight month. The year 2008 registered the highest number of job losses since the end of World War II in 1945. As a result, the U.S. unemployment rate broke above 7%. Large corporate employers—including those previously viewed as high-growth, such as Cisco, Microsoft and Home Depot—have announced plans for 140,000 job reductions so far this year.

Retail sales reflected declining consumer sentiment and were down 2.7% for the month of December. A drop in large fleet purchases caused January automobile sales to drop below an annualized rate of 10 million units, with Ford and General Motors registering light vehicle sales declines of 40% and 50%, respectively, compared with the previous year. Toyota posted a decline of 34% compared with 2007. December marked the first time that auto sales in China topped those in the U.S. Chrysler received its $4 billion share of the automakers’ bailout funds, which enabled it to keep funding its operations. The auto manufacturers’ troubles carried through to the broad manufacturing sector, with factory orders, durable orders and industrial production all down in the most recent reports.

Many economists argue that this recession was triggered by the housing industry and that housing must therefore lead the recovery. While existing home sales rose in December by 6.5% on a seasonally adjusted basis compared with November, industry analysts reported that 45% of those sales were due to banks unloading foreclosed properties or homeowners selling to avoid foreclosure. For 2008, new housing starts dropped below 1 million, a nearly 20-year low. While inventories of unsold homes hover between nine and 10 months’ supply, inventories of unsold condos are at an all-time high of almost 17 months. Home prices were down about 18% year-over-year as measured by the most recent November Case-Schiller data.

Inflation indicators continue to be benign, with both consumer and producer price indices down for the month of December. Commodity prices have also shown a measure of stability, as bellwether crude oil futures prices hovered in the low- to mid-$40-per-barrel range during the month. These developments have enabled the Fed to concentrate wholly on stimulating the economy rather than controlling inflation. With the government expanding liquidity so dramatically, market watchers fear, however, that inflation is a longer-term concern.

Financials and the credit markets continue to be at the center of
investor focus.

The main market story continues to be with the financial sector. Two of the largest institutions, Bank of America and Citigroup, announced huge earnings losses in January. It appeared that Bank of America underestimated the impact of absorbing overpriced assets in its acquisition of Merrill Lynch. This situation cost ex-Merrill CEO and Wall Street veteran John Thain his position in the combined entity. Citigroup determined that its previous efforts to become a financial “supermarket” were not successful and therefore decided to spin off its Smith Barney brokerage unit and focus on doing business with large companies and wealthy individuals.

Throughout most of the month, the Obama stimulus plan was debated by Congress. The fight for the plan was characterized as a tug of war between the majority Democrats’ focus on additional government spending and Republican emphasis on tax relief. The total dollar value of the package appeared to settle out in the mid-$800 billion range.

There were signs of good news in the fixed-income credit markets as the interest rate differentials between U.S. government securities and other types of debt securities narrowed. Even rate differences between government bonds and riskier non-investment-grade bonds narrowed considerably. A widely recognized index of non-investment-grade bonds rose 6% in January, whereas an index comprising U.S. Treasury securities declined 3%. The 10-year Treasury bond yield moved off its December lows to end the month with a 2.84% yield.

With overnight Fed funds rates near zero, the Treasury yield curve actually steepened during the month, although it still does not appear that credit is trickling down to potential borrowers as rapidly as desired. While it is true that credit spreads have narrowed relative to U.S. Treasury securities, lending standards are tighter, and banks are more inclined to rebuild capital reserves than make loans. One would think that with the opportunity to lend at such favorable spreads, banks would be aggressively seeking to place capital, but the risk premium is still not great enough to get them off the sidelines.

Market Reaction

As mentioned above, the U.S. and world stock markets produced negative returns for the month. The broad market as represented by the Russell 3000 Index declined 8.4%. Large-company stocks outperformed small-company stocks, with the Russell 1000 Index of large-companies down 8.1% in January compared with 11.1% for the Russell 2000 Index of small-company stocks. International stocks underperformed U.S. stocks modestly, with the developed markets index down 9.8% and the developing (emerging) markets performing better, down 6.4%. In the currency markets, the dollar once again reversed trend against the Euro, appreciating 9.1%, and remained flat against the Japanese yen.

In other stories, further reports from the Madoff fund scandal showed a much broader range of investors were defrauded than previously thought. In addition, Israel reached a tentative ceasefire with the Palestinian group Hamas in its land war in the Gaza strip.

Investment Fund Review

Inflation Protection Fund

Fund January
Inflation Protection Fund -0.5%
Barclays Capital Inflation Linked Index +0.8%
Difference -1.3%
  • The Inflation Protection fund underperformed its benchmark in January, primarily as a result of the fund’s diversification into inflation-based strategies other than U.S. Treasury Inflation Protected Securities, specifically a 10% allocation to commodities. The Dow Jones AIG-Commodity Index fell 5.4% in January. The fund’s investment in emerging market inflation-linked securities also contributed to underperformance as investors shunned global credit risk in favor of U.S. credit risk.

Domestic Bond Fund

Fund January
Domestic Bond Fund -0.4%
Barclays Capital U.S. Universal (ex MBS) Index -1.0%
Difference +0.6%
  • The Domestic Bond Fund declined 0.4% in January, but nevertheless outperformed its benchmark. The fund clearly benefited from its underweight position in U.S Treasury securities as the fixed-income markets began their slow move back toward normalcy.
  • Nearly all of the fund’s investment managers contributed to the fund’s outperformance in January with the exception of the fund’s positive social purpose investments, which are linked to rates on U.S. government securities. Additionally, the fund’s exposure to international bonds detracted from performance as a result of strengthening in the U.S. dollar compared with most foreign currencies.

Domestic Stock Fund

Fund January
Domestic Stock Fund -7.9%
Russell 3000 -8.4%
Difference +0.5%
  • The Domestic Stock Fund declined significantly during January, losing nearly 8% of its value.
  • The fund, however, outperformed its benchmark, primarily as a result of good market-relative performance by several of the fund’s active investment managers, and, in particular, by the fund’s manager that focuses on stocks of undervalued companies.

International Stock Fund

Fund January
International Stock Fund -8.5%
MSCI ACWI x US -8.5%
Difference   0.0%
  • The International Stock Fund performed in line with its benchmark. The fund’s higher-than-benchmark weighting in stocks from developing countries positively influenced performance, though this was offset by the fund’s higher-than-market exposure to international real estate investment trusts, as the fundamental for real estate markets continued to deteriorate.

Multiple Asset Fund

Fund January
Multiple Asset Fund -5.0%
Composite Benchmark -5.6%
Difference +0.6%
  • For the month, the fund outperformed its benchmark, as the positive contribution in the Domestic Stock Fund and Domestic Bond Fund more than offset the underperformance in the Inflation Protection Fund.

Balanced Social Values Plus Fund

Fund January
Balanced Social Values Plus Fund -3.8%
Composite Benchmark -4.4%
Difference +0.6%

 

 
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