By Martin E. Landry, CFA, CFP®, CIMA®, CIPM Senior Investment Analyst

Global equity markets were pummeled for much of the fourth quarter. While being battered relentlessly by swiftly deteriorating macroeconomic data, investors fled stocks of virtually all sizes, styles, and geographic origin. At the beginning of the quarter, still-frozen credit markets fanned stock market volatility and intensified risk aversion to historic heights. A broad sell-off intensified, fueled by intense selling by hedge funds and mutual funds struggling to meet investor redemptions. Stock prices retreated in many cases to levels first seen in the late 1990s; for some, market values reached multi-decade lows. By late October, the two-year old subprime lending crisis had morphed into a global systematic meltdown which required unprecedented coordinated fiscal intervention to stabilize capital markets.

Equities closed the quarter with steep losses and the S&P 500® Index finished 2008 with the worst calendar year loss -37.00% since 1937. Large-capitalization equity benchmarks such as the S&P 500® and Russell 1000® indexes posted fourth quarter returns of -21.94% and -22.48%, respectively. As is often the case at crisis inflection points in the markets, the losses came against a backdrop of tremendous volatility in daily index movements. During the quarter, the S&P 500® Index experienced 10 days where the index fell over 5% and seven days where the index gained over 5%. At its intraday low on November 20, 2008, the S&P 500 Index had fallen 45% from its September 30, 2008 value. From that point to the end of the year, the Index gained 20%. In step with U.S. markets, international stocks fell during the quarter against a setting of large daily price moves and wild currency swings. The MSCI All Country World ex-U.S. Index (Net), representing both developed and emerging international markets, slumped -22.34% for the quarter.

Despite the ultra-high levels of volatility that prevailed in the fourth quarter, there was little comfort in diversification. Correlations across major asset classes tightened substantially, which was also the case with U.S. market capitalization segments and equity styles. No part of the U.S. equity market was able to distinguish itself from the steep sell-off; however, the relative safety of utilities, consumer staples and healthcare led these sectors to meaningfully outperform the broader market even as they declined. Large capitalization equities managed to outperform their small capitalization counterparts by approximately 3.6% (based on the Russell 1000® and Russell 2000® index performance), although both benchmarks – which rang up quarterly declines of -22.48% and -26.12%, respectively – were deeply “in the red”. Within the U.S. large capitalization arena, value outperformed growth by a narrow margin, although both styles were under severe pressure throughout the quarter – value primarily due to poor performance in financials, growth as a result of sharply-lower stock prices in technology companies. The Russell 1000® Value Index and Russell 1000® Growth Index had total quarterly returns of -22.18% and -22.79%, respectively.

Commodity prices slumped further during the quarter extending the steep downturn that began in July. Oil prices ended the year around $44/barrel - a stunning decline of nearly 70% from their peak level of about $145 during the summer.

As investors became alarmed by the world’s impaired financial systems and the emergence of the first global recession in decades, share of international companies were sold as well during the quarter. The MSCI EAFE Index (Net) and MSCI Emerging Markets Index, two well-known indicators of the performance of foreign stocks in developed and emerging markets, skidded -19.95% and -27.60%, respectively, during the quarter. The U.S. dollar, despite weakening against many currencies, was still up considerably for the year, hurting U.S.-based investors who chose to diversify beyond local borders.

From a regional perspective, the United Kingdom lost -26.36% for the quarter hindered by a weak pound sterling. European stocks fell in line with U.S. stocks – almost -23%. Greece, Ireland and Norway suffered through a second consecutive quarter of losses over -40%. Japan fared better than most major markets (only down -9.01%), overwhelmingly due to the surging yen. In emerging markets, China fared better than most with a decline of only -10.75% for the fourth quarter. Russian stocks faced a crisis of confidence by foreign investors and wound up losing -51.30% for the quarter.

Entering the fourth quarter, investments in public real estate companies, including REITs, were relative outperformers compared to broader market indices. This changed abruptly as REITs fell victim to the systematic increase in risk aversion. REITs experienced unheard-of volatility, tumbling by double-digit percentages in one trading day only to be followed by a double-digit percentage gain the next. By the time the quarter was through, The Dow Jones Wilshire Real Estate Securities Index had fallen -40.40% for the quarter and had retraced to levels first reached in early 2004.

All indices are unmanaged and not available for direct investment. Index performance assumes no taxes, transaction costs, fees or expenses. This update is prepared for general information only and it is not to be reproduced.