JANUARY 2010

U.S. equities declined in January, with the Russell 3000 Index falling 3.6% during the month.  Mid capitalization stocks, measured by the Russell Mid Cap Index, returned -3.3% while large and small cap stocks posted slightly lower returns, with the Russell 1000 Index and Russell 2000 Index returning -3.6% and -3.7%, respectively.  Value stocks outperformed growth stocks within all market capitalizations.  The Russell 3000 Value Index posted a -2.8% return versus -4.4% for the Russell 3000 Growth Index.  Over the trailing one-year period, mid cap stocks substantially outperformed large and small cap stocks.  Performance for the Russell indices in January and the trailing one year is shown in the chart below.

While the U.S. equity markets bottomed in March last year and posted strong returns for the 2009, net asset flows into U.S. equity mutual funds were negative for the year.  Over $24 billion came out of U.S. equity mutual funds in 2009, while the broad market, as measured by the Russell 3000 Index, returned approximately 28%.  Following the last U.S. recession, in 2003, U.S. equity mutual funds experienced net inflows of more than $130 billion.  With the prevailing uncertainty about future growth in the U.S. economy and equity market, many investors question whether there will be a surge of assets flowing into U.S. equity mutual funds in 2010.  In January, however, estimated net inflows were approximately $2.5 billion.¹ 

Within the S&P 500 Index, the technology sector had the largest negative impact on performance during the month.  In 2009, technology stocks led the appreciation in the U.S. equity market, but retreated to start 2010 amid concerns of decreasing earnings.  Materials stocks were weak due to declining commodity prices as a result of potential for weakening Chinese demand, with the Dow Jones-UBS Commodity Index falling 7%.  Additionally, concerns about lower wireless phone rates, which are primary sources of growth for the largest providers, such as Verizon and AT&T, led to negative returns in the telecommunications sector.  Conversely, the health care sector was the lone sector to post positive returns, albeit modest at 0.5%, after election of Republican candidate Scott Brown as Massachusetts Senator decreased the likelihood that the current health care reform bill would pass in the U.S. Senate.  Proposed financial regulations intended to separate deposit-taking and credit creation from proprietary trading activities dubbed “The Volker Rule,” weighed on the financials sector,  eliminating gains in the middle of the month and turning January returns negative, down 1.5%.²

¹ Morningstar, Inc.

² “World Markets Review.”  Capital Guardian Trust Company.  (January 2010).