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Monthly Market Monitor - May 2011

Market Indices1MayYear-to-Date
S&P 500-1.13%+7.82%
MSCI EAFE-2.81%+6.66%
MSCI Emerging Markets-2.58%+2.57%
Barclays U.S. Aggregate Bond+1.31%+3.02%
Barclays Municipal+1.71%+4.06%
Barclays US Corporate High Yield+0.49%+6.01%

May began with the banner headline that Osama bin Laden had been killed in a U.S. military operation in Pakistan, and global markets hit their highs for the month. However, as the month progressed, global equity markets gave back some of the gains we saw in April, while bonds across the board continued their modest climb. Investors were cautious as economic indicators reflected the cumulative effects of beyond-target inflation, deteriorating home valuations back to near decade lows, slowing manufacturing activity, and lackluster job growth. Sentiment was also challenged by geopolitical uncertainty in the Middle East/North Africa and concern over technical default in Greek sovereign debt.

On May 23rd, global stocks fell to the month’s lowest levels amid concerns that Europe’s debt crisis is worsening as the backlash over austerity measures in Spain resulted in widespread defeat of the incumbent party in local elections and as S&P revised down Italy’s credit-rating outlook to negative from stable. Overall, stocks experienced their worst monthly performance since last August, ending a 5-month rally. Nevertheless, the U.S., developed international and emerging market equity indices remain in positive territory for the year to date.

The S&P 500 index saw negative returns of -1.13% as investors became increasingly defensive ahead of the expiration of the Federal Reserve’s second round of quantitative easing, “QE2”, which will come to a close at the end of June. Just four of the ten sector groups showed positive performance last month, with Consumer Staples gaining 1.5% and Utilities, Telecom and Healthcare each rising 0.9%. This compares to nine of ten posting positive returns in April, excluding Energy from the month’s rally.

Non-U.S. developed equities experienced deeper May pullbacks than the U.S. The MSCI EAFE index contracted by -2.81%, led lower in part by component supply disruptions associated with Japan’s earthquake and staggered manufacturing infrastructure recovery. Emerging markets posted a -2.58% loss, giving back much of +3.12% gain posted in April.

By contrast, core investment-grade U.S. bonds, as measured by the Barclays U.S. Aggregate Bond index, posted a +1.31% gain in May, slightly greater than its +1.27% increase in April. Similarly, municipal bonds, as measured by Barclays Municipal Index, returned +1.71% in May, building on the +1.79% return the index posted in April. The Barclays U.S. Corporate High Yield bond index returned +0.49% in May, less than April’s 1.55% gain, but still positive, as Treasury yields remained low and investor confidence was boosted by positive earnings surprises and minimal default risk. According to Fitch Ratings, the trailing 12-month U.S. high yield par default rate ended April at 1.1%, virtually unchanged from its March level and projected to remain at low levels for the duration of the year.

  1. Morningstar Direct

Prepared by:Suehyun Kim and Richard Anderson, Directors, Cetera Financial Group Research Department

The views are those of Suehyun Kim and Richard Anderson, Directors, 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 instability, and differences in accounting standards.

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