November 2007 Market Commentary

The heightened volatility of past months continued during the month of November. Although equity markets rallied during the last few days of the month, the stock market still experienced its worst month in nearly five years. At one point during the month many equity markets officially “corrected,” which is technically defined as a decline of 10% from a previous high. This correction, however, was very short lived as markets rallied during the last week of the month on increasing optimism for continued rate cuts by the Federal Reserve. The Federal Reserve issued several statements citing the need for monetary policy to remain “nimble,” and expressing concerns that continued credit market turmoil posed further risks to the economy. Investors welcomed these statements and interpreted them to mean that there is a growing likelihood that the Fed will cut interest rates at the next policy meeting on December 11. However, despite the potential rate cut, overall investor sentiment remains mixed. Much market uncertainty remains related to the ongoing housing sector weakness and credit market turmoil. With this said, the increased volatility of the past few months is likely to continue.

For the month of November, the S&P 1500, a broad measure of the U.S. equity markets, returned -4.37%, with large cap stocks declining 4.18% and small cap stocks falling 7.42%. At the sector level, consumer staples (+2.63%) and health care (+0.52%) were the only sectors to post positive returns during month. Information technology (-8.10%), financials (-7.83%) and telecommunications services (-7.33%) stocks were the leading detractors during the month. Large and mid cap growth stocks continued to outperform value stocks, while small value stocks slightly outperformed their growth counterparts.

International markets were also negative for the month. The MSCI EAFE Index fell 4.28% in local currency terms, and was down 3.29% in dollar terms. Growth stocks outperformed value stocks. Among developed markets, only Spain (+0.43%), Portugal (+0.31%) and Switzerland (+0.13%) posted positive gains during the month, while Ireland (-8.45%), Belgium (-8.39%) and Sweden (-8.08%) noticeably underperformed. The MSCI EAFE Small Cap Index fell 7.20%, and emerging markets declined 7.09%. The BRIC Index fell 6.39%.

The fixed income markets were generally positive for the month. The 10-year Treasury yield ended at 3.97%, down 51 basis points from the prior month, and the 30-year Treasury yielded 4.40% at month end, down 24 basis points for the month. The Lehman Aggregate Bond Index gained 1.80%. Government bonds increased 2.75%, while corporate bonds gained 0.85%. Mortgage backed bonds rose 1.74%, and municipals gained 0.64%. Other sectors increasing for the month included international bonds (+1.94%), and TIPs (+3.97%). High yield bonds fell 2.17% on concerns about additional economic weakness.

The Dow Jones-AIG Commodity Index fell 3.14%. Real estate, as represented by the S&P REIT Index, had a difficult month, falling 9.24%.