Afternoon Review

December Recap:

Markets rallied in December as governments around the world responded aggressively to the global fallout and investor appetite for risk edged higher. The widely publicized VIX index, a measure of fear in the market, has declined over 50 percent from its November 20 high, which suggests that the fear surrounding stocks has dissipated somewhat and demand for risk-taking increased. Another indication of an increased demand for risk-taking is evident in the S&P 500’s lagging performance compared to riskier asset classes.

While the S&P 500 posted a modest return of 1.06 percent, the S&P 400 Mid Cap Index and S&P 600 Small Cap Index climbed 4.85 percent and 6.10 percent, respectively. Meanwhile, international equities surged with the iShares MSCI EAFE (EFA) climbing 8.88 percent and the iShares MSCI Emerging Markets (EEM) up 10.35 percent. Even more impressive were the returns on REITs, which had been smashed in the prior two months by investors’ preference for businesses that don’t require debt. The Vanguard REIT ETF (VNQ) gained 16.68 percent in December and global REITs increased 10.14 percent.

Most sectors posted gains with the exception being energy stocks. The main culprit for the sector’s poor performance is commodity prices that have plummeted in response to a global recession that has created expectations for decreased global demand. S&P GSCI Commodity Index Fund (GSG), which is about 75 percent devoted to energy with the bulk of that focused directly on crude oil, fell 11.18 percent this month. Greenhaven Continuous Commodity Index Fund (GCC), which tracks an equal weighted basket of 17 commodities, increased 0.64 percent.

The record low yields seen in November were surpassed in December with the two-year falling 21.5 basis points on the month to yield 0.76 percent, and the ten-year fell 70.5 basis points to yield 2.12 percent at the end of 2008. Yields on MBS ended the month flat to Treasuries on a spread basis, after widening out in early December only to snap back in the final week of the year.

The iShares Barclays Aggregate Fund (AGG) was up 6.65 percent due to considerable tightening of credit spreads, the continuing rally in Treasuries and the fund itself moving from a discount to a premium. iShares TIPS fund (TIP) also enjoyed some nice price appreciation as the deflationary scare that hurt TIPS the past two months proved to be short lived.


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Peter Lazaroff, Junior Analyst