The Bureau of Labor Statistics released February employment figures on Friday which showed continued, yet far from robust, improvement. Payrolls dropped by 36,000 in February, nearly half the consensus expectation for losses. In another positive sign, prior month losses were reduced, indicating that the massive layoffs of a year ago have abated. In addition, the unemployment rate was unchanged at 9.7%. Many economists believe the recent figures were negatively distorted by the record snowfall experienced in many areas of the country, leading to expectations of big increases in employment for March and April. That may well be the case, although the percentage of people working part-time for economic reasons jumped by 500,000, causing the broader underemployment rate to rise to 16.8% from 16.5%.

The equity markets cheered the news, with the Dow Jones Industrial Average and the S&P 500 posting 2.3% and 3.1% gains, respectively, for the week. The S&P 500 closed at 1,138 and seems poised to clear the high for 2010 at 1,050. Should the index clear this level, the bull market that began one year ago would have a strong chance of continuing.

However, a cautious approach is still warranted. It should be obvious that much of the recovery in the economy over the last several months is due to the massive fiscal and monetary stimulus programs that will soon end. Despite such stimulus, the economy is still a long way from the robust job creation required to significantly dent the high unemployment rate. And while most economic indicators point to recovery, data from the housing market have taken a significant turn for the worse in recent weeks – this despite loud forecasts that housing had bottomed.

As a result, this economic recovery is much less impressive than those following previous deep recessions, calling its sustainability into question as stimulus fades. Next month, the Federal Reserve will no longer be a buyer of mortgage-backed securities, and most of its emergency programs will have expired. Together with the still anemic pace of bank lending, economic growth faces significant challenges in the second half of this year.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.