By Jay H. Edmondson, Investment Analyst
During the fourth quarter of 2011, familiar macro themes, such as the sovereign debt crisis in Europe and moderating growth expectations in China, continued to dominate the headlines and contributed to market uncertainty and volatility. Global equity markets, however, showed resilience in the fourth quarter and erased a good portion of the losses suffered in the prior quarter. In the U.S., the S&P 500® Index posted a fourth quarter return of 11.82%, bringing the full year return to a positive 2.11%. The broader U.S. market, as measured by the Russell 3000® Index, gained 12.12% for the quarter and 1.03% for the one-year period.
From a sector perspective, performance was unanimously in positive territory as all sectors within the Russell 3000® Index advanced during the fourth quarter. Cyclical sectors benefitted from improvement in data points for the domestic economy, while the more defensive sectors tended to lag. Five of nine sectors posted double-digit gains with the best performance coming from the energy and producer durables sectors. The weakest performers were the utilities, technology and consumer staples sectors which still posted solid single-digit gains during the quarter. For the entire calendar year the more defensive utilities and consumer staples sectors were the best performers, while the financial services and materials & processing sectors posted the worst returns.
Higher beta, lower quality stocks tended to outperform during the quarter. In terms of equity market capitalization and style, everything (small, mid, large; growth, core, value) advanced during the fourth quarter of 2011. Small-cap companies outperformed their large-cap counterparts as the Russell 2000® Index posted a fourth quarter return of 15.47%, while the Russell 1000® Index advanced 11.84%. However, over the one-year period, large-cap stocks substantially outpaced small-cap stocks by 5.68%. Style differentiation was evident in the fourth quarter as value-oriented stocks outperformed growth-oriented stocks across all market capitalization segments. In the large capitalization segment, the Russell 1000® Value Index and Russell 1000® Growth Index had quarterly returns of 13.11% and 10.61%, respectively. Over the one-year period, large-cap growth outpaced large-cap value by 2.25%.
International equity markets advanced during the quarter but were unable to overcome the dismal results posted in the previous quarter. The MSCI-EAFE Index (Net), a measure of international developed country returns, posted a positive fourth quarter return of 3.33%, bringing the one-year return to -12.14%. Emerging markets outperformed developed markets during the period as the MSCI Emerging Markets Index (Net) posted a quarterly return of 4.42%, bringing the calendar year performance to -18.42%.
Most of the regions within the MSCI® All Country World ex-U.S. Index (representing both developed and emerging international markets) ended the quarter in positive territory. The best performing markets were primarily in Latin America and Europe and included countries such as Peru, Mexico, Ireland and Norway. Some of the negative performing markets included Greece, Turkey and India. The U.K. market generated a solid positive gain for the quarter, while Japanese markets continued to decline. From a sector perspective, energy comfortably outperformed all sectors, while consumer staples and healthcare also performed well. The utilities, financials and consumer discretionary sectors lagged during the quarter. From a calendar year perspective, most markets and sectors ended the period in negative territory.
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