By Jay H. Edmondson, Investment Analyst

During the third quarter of 2011, global equity markets experienced significant declines as familiar macro themes, such as the sovereign debt crisis in Europe, the U.S. debt downgrade and moderating growth expectations in China, continued to dominate the headlines and contributed to market uncertainty and volatility. In the United States, the S&P 500® Index experienced the worst three-month period since the financial crisis in 2008, posting a third quarter return of -13.87% and bringing the year-to-date return to -8.68%. The broader U.S. market, as measured by the Russell 3000® Index, posted similar negative returns of -15.28% for the quarter and -9.90% year-to-date.

From a sector perspective, performance was unanimously in negative territory as all sectors within the Russell 3000® Index declined during the quarter. Sectors perceived as more defensive generally outperformed the more economically sensitive sectors during the quarter. Though negative, the utilities and consumer staples sectors held up reasonably well, while most other sectors experienced double-digit declines. Four sectors — materials & processing, producer durables, financial services, and energy — declined over 20% during the period.

Higher quality, low beta stocks tended to outperform during the quarter. In terms of equity market capitalization and style, everything (small, mid, large; growth, core, value) was down during the third quarter as all equity indexes maintained by Russell Investments experienced negative returns. Large-cap companies outperformed their small-cap counterparts as the Russell 1000® Index posted a return of -14.68% and the Russell 2000® Index declined -21.87%. Within the large capitalization segment, the Russell 1000® Growth Index and Russell 1000® Value Index had quarterly returns of -13.14% and -16.20%, respectively, as the large-cap value benchmark was weighed down by a higher exposure to the underperforming financials sector. Year-to-date, large-cap growth has outpaced large-cap value by just over four percent.

International equity markets fared even worse during the quarter and were impacted by ongoing macroeconomic concerns, particularly in Europe. The MSCI-EAFE Index (Net), a measure of international developed country returns, posted a dismal third quarter return of -19.01%, bringing the year-to-date return to -14.98%. Emerging markets were hit harder than developed markets during the period as the MSCI Emerging Markets Index (Net) posted a quarterly return of -22.56%, bringing the year-to-date performance to -21.88%.

From a country perspective, all markets within the MSCI All Country World Index ex-U.S. (representing both developed and emerging international markets) ended the quarter in negative territory. On a regional basis, Europe, Asia/Pacific ex-Japan and Latin America experienced declines of over 20%. Japan held up relatively well as its economy continued to recover from the earthquake, and it was largely insulated from any direct impact from Europe. From a sector perspective, all groups generated negative results during the quarter although sectors with less vulnerability to the economy such as consumer staples, telecommunication services and healthcare held up better than the overall market. Economically sensitive sectors such as materials, industrials and financials were the worst performing groups during the quarter.

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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.