Global stocks rallied strongly last week as panic selling began to ebb, the Federal Reserve lowered interest rates, and the credit crisis showed signs of easing. The S&P 500 posted its best weekly gain in 34 years, rising 10% to 968.75, while the Dow Jones Industrial Average climbed 11% to close on Halloween at 9,325.01. International markets rallied even more, with the MSCI Emerging Markets index up 20% for the week.

Last week’s rally did little, however, to dent the global bear market that accelerated in October. MSCI reports that 67 of its 68 global equity benchmarks declined in October, with 37 losing at least 20%. The S&P 500 lost 17% in October and is down 34% in 2008. This bear market has been so extensive that U.S. Treasuries at historically low yields was about the only safe place to hide. In fact, just 2% of the stocks in the S&P 500 are higher today than they were at the market peak over a year ago.

Weekly Economic Data

Economic data released last week was decidedly downbeat, highlighted by the first release of U.S. economic growth for the third quarter, which was estimated to have declined at a 0.3% annual rate. While this was slightly better than expected, the economy is clearly slowing at a rapid pace. Remember, as recently as August, economists forecast third quarter growth of over 3%. Consumer spending plunged 3.1%, the biggest drop since the 1980 recession, and consumer confidence (shown below) hit the lowest level (38.0) since the index was created in 1967.

Weekly Update

In addition to the GDP report, the Case/Shiller index of housing prices showed the housing market continues to worsen as prices fell 16.6% from September 2007. Durable goods orders surprised with a 0.8% gain, but declined 1.1% excluding transportation equipment and higher defense spending. The Chicago Purchasing Managers Index came in less than expected at a weak 37.8.

In response to the weakening economy, the Fed voted unanimously to cut the Fed Funds rate by 50 basis points to 1.0%, as expected. The Fed retains an “easing bias” as it continues to be more worried about downside risks to growth rather than inflation. The Fed will likely remain accommodative for several months until the economy begins to recover and credit conditions improve.

The good news for the markets last week, other than the relief rally, was additional signs of improvement in the credit markets. The rise in Treasury yields indicates that efforts to bolster confidence may be working to thaw credit markets that have been frozen since the bankruptcy of Lehman Brothers on September 15. The Libor rate dropped to 2.86% this morning, continuing a move lower since peaking at 4.82% on October 10. We continue to watch for signs of improvement in the market for corporate and mortgage credit, areas that are critical for any economic recovery.

Market Outlook

The equity market successfully retested the October 10th low on Monday of last week, closing just 8 points off the low before rallying into Halloween. With the markets putting some distance between current levels and the low (840 on the S&P 500 Index; 7,882 on the Dow), confidence is rising in a sustained rally. It is encouraging that stocks rallied in the face of weak economic data, suggesting that much of the bad news has been priced in. However, we believe this rally will prove to be just another bear market rally, similar to the one that ended this past May, given the tremendous de-leveraging that is occurring across the globe.

Stocks are likely to tread water until Tuesday’s election results are known. The markets are positioned for an Obama victory, but probably not for a Democrat-controlled Congress. On Friday, expect the employment report to have a significant impact (consensus is for a rise in the unemployment rate from 6.1% to 6.3% and a loss of 200,000 jobs in October).

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.