Quarterly Recap - 2010 Fourth Quarter

Global equity markets posted strong positive returns again in the fourth quarter and finished the calendar year 2010 well into positive territory for the second consecutive year. The continuing economic recovery, strong corporate earnings and strengthening investor confidence were the primary factors driving equity markets forward for the fourth quarter and the year. Equity markets did experience another brief bump in the road in November, however, as fears surrounding the European debt crisis surfaced once again with Ireland becoming the second EU member (after Greece earlier in the year) to receive financial aid. But as the European debt concerns once again eased in December, equity markets responded in kind by finishing the quarter and year strong.

In the U.S., the S&P 500 Index finished the fourth quarter with a healthy positive return of +10.8%, and for the year gained +15.1%. The fourth quarter’s performance was strong across the board but was led by more growth oriented stocks and smaller capitalization stocks. Energy and Materials were the top performing sectors for the quarter, returning 21.5% and 19.0% respectively, while Utilities and Health Care were the bottom performing sectors, but still posted modestly positive returns. Small capitalization stocks, as measured by the Russell 2000, also posted strong returns for the quarter, returning +16.3%. Developed equity markets outside the U.S. posted a positive but less robust +6.7% return for the quarter, weighed down by the lingering sovereign debt concerns in Europe. Emerging markets also posted positive but more subdued returns in the quarter, as the MSCI Emerging Markets Index returned +7.4%. For 2010, developed non-U.S. markets returned +8.2% while emerging markets posted a very strong +19.2% return.

Fixed income markets reversed course in the fourth quarter and lost ground as interest rates, which had been falling steadily throughout the year, reversed course and rose during the quarter (all else being equal, as interest rates fall, bond prices rise and vice versa). The Federal Reserve’s second round of stimulus bolstered confidence that the economic recovery would be sustainable, helping send interest rates higher. The Barclays U.S. Aggregate Bond Index fell -1.3% for the fourth quarter but is still up a healthy +6.5% for 2010. Municipal bonds, as measured by the Barclays Municipal Bond Index, had an even more challenging quarter, returning -4.2%, but is also still positive for the year, up +2.4%. High yield bonds (junk bonds) were aided by news of a strengthening economy and additional stimulus from the Federal Reserve, and returned +3.2% for the quarter as measured by the Barclays U.S. Corp High Yield Index. For 2010, high yield bonds posted a very strong +15.1% return.

1. Morningstar Direct

If you have any questions, please contact Connie Chung, Cetera Financial Group, at (310) 257-7715.

The views are those of Alex Kaye, CFA, Head of Research, Research Department, Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Please consult your financial advisor for more information.

Small cap stocks may be subject to a higher degree of market risk than large cap stocks, or more established companies' securities. Furthermore, the illiquidity of the small cap market may adversely affect the value of an investment, so that shares, when redeemed, may be worth more or less than their original cost.