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Quarterly Recap - 2012 Third Quarter

Market Indices1Sep 20123Q2012Year-to-Date
S&P 500+2.58%+6.35%+16.44%
Russell 3000+2.63%+6.23%+16.13%
MSCI EAFE+2.99%+6.98%+10.59%
MSCI Emerging Markets+6.05%+7.89%+12.33%
Barclays US Aggregate Bond+0.14%+1.58%+3.99%
Barclays Municipal+0.60%+2.32%+6.06%
Barclays US Corporate High Yield+1.39%+4.53%+12.13%

U.S. equity markets posted solid third quarter performance after central bank actions ignited a resurgence of confidence on Wall Street. Reversing losses from the prior quarter, the Dow Jones Industrials, S&P 500 and the NASDAQ Composite all delivered their strongest third quarter returns since 2010. The action began as flagging economies in Europe drew out a promise from European Central Bank President Mario Draghi, "to do whatever it takes" to resolve the region's debt crisis. In an effort to lower runaway interest rates, Draghi later announced the ECB would purchase government debt of member nations that requested emergency aid. A week later, on September 13th, the Federal Reserve announced a third round of quantitative easing, or QE3, this time in the form of open-ended bond purchases. Fed Chairman Ben Bernanke said that to improve conditions to create more jobs, the central bank will make monthly purchases of $40B worth of mortgage-backed bonds and keep interest rates "exceptionally low through 2015."

Although the S&P 500 advanced for a fourth straight month, a flurry of weak economic data reigned in gains during the last two weeks of September. Key among the disappointments, second quarter U.S. GDP was revised lower to 1.3% from 1.7% and monthly national business activity shrank for the first time in three years. Smaller capitalized U.S. companies underperformed large-cap stocks as the Russell 2000 Index, a proxy of small-cap equity performance, rose 5.3% during the third quarter. Value narrowly edged out growth as the Russell 1000 Value Index rose 6.5% whereas the Russell 1000 Growth Index gained 6.1%. In quarterly sector performance, nine of the ten major U.S. sector groups advanced with Energy (+10.1%), Telecom (+8.1%), Consumer Discretionary (+7.5%) and Technology (+7.5%) gaining the most. Utilities (-0.5%) was the only sector to decline. Telecom (+25.9%) and Technology (+21.8%) are the top performing sectors so far this year.

Reflective of the strength in Energy, crude oil gained 8.5% during the quarter, and is up nearly 17% from its June 28th year low. Commodities, falling 13% last quarter, strongly rebounded as escalating gasoline and drought-stricken grain prices led an 11% third quarter advance in the S&P Goldman Sachs Commodity Index (GSCI), a broad measure of commodity performance. In overseas markets, despite new concerns about Spain, relief over the ECB's new stimulus program drove developed nations outside the U.S. and Canada to post quarterly gains in excess of American returns, as the MSCI EAFE Index rose 7% over the past three months. Emerging markets, as measured by the MSCI Emerging Market Index, likewise outperformed, with returns of nearly 8% beating out gains of all developed nations.

In the bond market, the Barclays US Government Bond Index returned just 0.6% last quarter. The yield on the benchmark U.S. 10-year Treasury note ended the quarter yielding 1.63%, nearly unchanged from the prior quarter. At the other end of the credit quality spectrum, non-investment grade corporate bonds widely outperformed Treasuries, returning 4.5% in the quarter, according to the Barclays US Corporate High-Yield Index. Investment grade bonds, as measured by the Barclays US Aggregate Bond Index, finished the quarter with a more modest 1.6% return. The Barclays Municipals Index finished the third quarter with a 2.3% total return.

1. Morningstar Direct (all performance percentages are total return based, which include reinvested dividend, interest)
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

The views expressed here are those of the Research Department, Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Please consult your financial advisor for more information.

Small cap stocks may be subject to a higher degree of market risk than large cap stocks, or more established companies' securities. Furthermore, the illiquidity of the small cap market may adversely affect the value of an investment, so that shares, when redeemed, may be worth more or less than their original cost.