MARKET OVERVIEW

The 2008 stock market crash continued last month, as fallout from the credit crisis rained down on Wall Street. The Dow Jones Industrial Average posted a third straight loss, breaking under 8,000 for the first time in five years. The S&P 500 crashed through its dotcom trough, touching the lowest level in eleven years. Treasury prices rallied 5.1%, the biggest advance since Ronald Reagan took office in 1981. Dallas Federal Reserve President Richard Fisher dubbed the crisis “the mother of all financial storms.”

Bedrock U.S. companies sank to decades’ lows. The price of General Motors, the world’s largest automaker, tumbled to a level last seen in 1943. Citigroup, once the world’s largest bank, tumbled to an eighteen-year low. Macy’s broke below its 1992 IPO price. Goldman Sachs fell below its 1999 IPO price. Circuit City filed for bankruptcy after fifty-nine years in business. Equity losses for the year topped $33 trillion, according to Bloomberg.

A barrage of grim economic reports weighed on investors. Employers laid off 240,000 workers in October, swelling the ranks of unemployed to 10.1 million, a twenty-five-year high. Retail sales tumbled 2.8%, the most since records started in February 1992. New home sales crumpled to the lowest level since January 1991. Consumer prices plunged a full percent, the most since the start of government records in February 1947. The drop in prices suggests deflation could be the newest menace facing the U.S. economy.

A recovery in corporate earnings remains elusive. At month-end, with 98% of companies reporting, Thomson Reuters predicted an 18.7% decline in third quarter S&P 500 profits. At the start of October, the forecast was -4.3%. Financial firms are looking at the worst results, with profits down 124% compared to a year ago. The energy sector is performing best, with profits up 59%. Estimates for fourth quarter earnings are sliding. Thomson Reuters predicted 46.7% growth on October 1. On November 28, the forecast was for 13.3% growth.

EQUITY UPDATE

STYLE AND MARKET CAPITALIZATION

The market crash of 2008 entered a third month in November, driving prices lower across equity asset classes. Growth underperformed value for a fifth month, the longest losing streak in more than two years. The Russell 2000 Index posted a second consecutive month of double-digit declines, a first for the index since its start in January 1979. With market values shrinking rapidly, index arbiters have trimmed their thresholds on what defines a large firm. Standard & Poor’s cut the minimum size from $4.5 to $4.0 billion. MSCI Barra cut their limit from $11.0 to $7.5 billion.

S&P 500 SECTORS AND INDUSTRIES

Last month’s sell-off was led by another dive among financial stocks. As a group, financial firms sank 18.4% in November, with the S&P 500 Financials Index descending to a fresh thirteenyear low. Entering 2008, financial companies constituted the largest portion of the overall S&P 500 Index. But, after a near 60% slide in share prices and $1 trillion in mortgage-related losses globally, the financial sector has slipped to fourth place, behind technology, energy and health care.

INTERNATIONAL EQUITY

Foreign shares extended a record-shattering losing streak in November, with the MSCI EAFE Index surrendering another 5.4%. The decline brings benchmark losses for 2008 to 46.3%. That is nearly double the largest-ever annual drop in the EAFE’s thirty-eight-year history. Share prices are retreating across every country and industry sector in the developed world, as hopes for a rapid economic recovery dwindle. Japan, Germany, Italy, Sweden and the overall euro zone all reported back-to-back drops in quarterly output last month, meeting the technical definition of a recession.

PERSPECTIVE

by Horacio A. Valeiras, CFA Managing Director and Chief Investment Officer Nicholas-Applegate Capital Management

GLAD TIDINGS — GOODBYE 2008!

I would be hard pressed to find an investor who isn’t eager to bid farewell to 2008. With global market values approximately halved or worse year to date, the financial crisis that began with deleveraging and bank failures and resulted in recession in the U.S. has tainted every industry sector worldwide. Although we haven’t witnessed market depreciation this pronounced since the 1930s, we don’t believe the global economies will sink into a depression in 2009, despite poor economic data. Governments around the world will have to cut interest rates further, taking a lead from the U.S. administration.

What is in store for markets in 2009? First, the credit markets have to warm to government measures. Until the credit markets begin to function effectively, it is very difficult to make predictions about any asset class. Absent a positive catalyst from the credit markets, we don't expect to see a big upward trend in equities. Consensus estimates for corporate earnings are still too high, and consumer demand for goods and services continues to weaken. Therefore, we believe debt will recover prior to equities.

Despite recent declines, emerging markets are still relatively expensive, though some single stock opportunities are starting to crop up, especially in Asia. Over the past few months, we have maintained a historically low emerging markets exposure in our international and global equity portfolios. With curbed risk appetites, investors are seeking safe havens in developed country currencies. We predict the U.S. dollar will do well versus the euro, less so against the yen.

Although we won't look back with auld lang syne on 2008, it could mark the start of improved risk management and greater product diversity — a benefit to pension plans.