After a post-Thanksgiving holiday decline of over 7%, equity markets spent the rest of last week rallying in the face of ugly economic news. Last Monday, the National Bureau of Economic Research (NBER) announced the peak of economic activity occurred in December 2007, thus making the official declaration of a recession. Of course, the NBER declaration was anything but news to investors who have experienced a 50% decline in their equity portfolios, or any of the 1.9 million Americans who have lost their jobs this year.

Other economic news released last week made clear the economy will likely remain in recession for many months to come. The Institute for Supply Management released data showing that both the manufacturing and services sectors are firmly in contraction, construction spending fell, and consumer confidence remained depressed. But the big news of the week was Friday’s dire employment report which showed a worse than expected 533,000 jobs were lost in November. There were no silver linings in the report as employers across a wide range of industries eliminated jobs.

However, the markets had a remarkable reaction to this news, with the Dow Jones Industrial Average rising 517 points from its Friday low. The market’s ability to rally after a week of horrible economic news suggests an oversold rally is at hand as much of the bad news is priced in. With President-elect Obama proposing the largest infrastructure spending plan in 50 years, it is very risky to place bearish bets on a market down 50% from the peak.

Given the challenging economic environment and an uncertain 2009 outlook, we believe this is a trading rally rather than the start of a new bull market. The market is extremely oversold and seasonal tendencies are favorable for a rally. Should the S&P 500 Index close above the 900 level, the odds of a rally to 1000 or higher are good. We expect significant resistance around S&P 1000 and would look to reduce equity exposure near that level.

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.