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A Quarterly Publication Winter 2011 What a way to end a decade! The first 10 years of the new millennium are on the books, and while the decade was truly unspectacular for investors, we nonetheless finished on a very positive note. The 2010 annual return data for the major asset classes are as follows: 315 W. Adams St. Muncie, IN 47305 (765) 254-3500 3930 Edison Lakes Parkway Suite 250 Mishawaka, IN 46545 (574) 271-0374 www.indtrust.com Large Cap US Equity (S&P 500 Index)....................................................15.1% Mid/Small Cap US Equity (Russell 2000 Index).................................... 26.9% International Developed Markets Equity (MSCI EAFE Index) .............. 7.7% Emerging Markets Equity (MSCI Emerging Markets Index)............... 18.9% Fixed Income (Barclays Capital US Aggregate Bond Index)................. 6.5% Real Estate (FTSE NAREIT).......................................................................27.9% Across equity asset classes, U.S. Mid/Small Cap stocks led the way in 2010 and Emerging Markets again posted a strong year. Fixed Income had a good year as well, despite the headwinds that bonds faced in December. Also, International Developed Markets Equity trailed Large Cap U.S. Equity, mainly driven by sovereign debt concerns and relative market weakness in Europe. For the entire decade prior to 2010 (2001 – 2009), the S&P 500 Index total return was (0.02%). Thus, the 15.06% return in 2010 is literally the entire return for the last decade — quite a dichotomy across the decade and a solid year. In general, all asset classes showed solid returns for the year and all indications point to a continuation as we start the new year. 2010 Recap Stocks started the year with a nice run, only to see quite a correction in the May – June time period as the European debt crisis, the U.S. stock market “flash-crash” and fears of a slowing economic recovery took hold. Since then, markets have rallied with a slight pause right around the election. History has shown that when the Fed is accommodative on monetary policy that equity markets tend to benefit. On the bond front, the Fed’s posture was also the key to solid bond returns, and indeed bonds posted a good year despite the December pullback, especially when noting that interest rates have been below 4.00% for almost all of 2010. Regarding the economic situation, there are a few points worth mentioning: • Unemployment finished 2010 slightly above 9% after starting the year at 9.9%. • 2010 U.S. GDP was expected to grow at an annual growth rate in the range of 2% to 3%. For the first, second and third quarters of 2010, the annualized GDP growth rate was 2.7%, 1.7% and 2.6%, respectively. • Housing has been, and is likely to continue to be, a drag on the economy. Housing data did not firm up until the last quarter, but does appear to be improving slowly. The short-term uptick in interest rates will prove to be a challenge, but hopefully the worst of the housing slump is now behind us. • Inflation remains subdued with final 2010 CPI likely to come in around 1.3%, on the low end of the Fed’s target range. Despite the fiscal and monetary stimulus, we do not expect high inflation continued on back ITC_Winter_11.indd 1 1/24/11 2:04:18 PM to be a problem in 2011. We do, however, expect the Fed to begin back-tracking some of the monetary stimulus as soon as CPI begins to show consistently high growth. 2011 Outlook Our outlook for the coming year is as follows: • U.S. GDP will grow in line with consensus projections of roughly 2.5% to 3.1% for 2011. Emerging economies’ growth will outpace that of developed economies. • U.S. unemployment will gradually improve. However, it would take more than 4 million new jobs in 2011 to crack 8%, and we are currently at a 3 million pace at this time. • Inflation (CPI) should stay tame in 2011 and will likely end the year in a range between 1.5% and 2.0%. • Interest rates may very well end 2011 where they began, however rates may become volatile throughout 2011 due to many factors. First, Fed monetary policy will attempt to keep rates low. However, an improved U.S. economic outlook would tend to increase rates, as inflation expectations would rise. If the economy, employment and inflation pick up steam, though, the Fed will be quick to reverse course on its accommodative monetary policy. • Stock markets may continue their strong 2010 close into 2011. A correction is possible if the market continues to run because the second half of 2011 will present U.S. corporations with tougher year-over-year earnings comparisons, which may hurt earnings growth. Also, a continued run-up in stocks could raise valuations (which are currently at the upper end of the fairly valued range) to unsustainable levels without a correction of some sort. Overall, 2011 should continue to offer positive returns for investors, and certainly a stronger environment as the economy continues to improve. Coupled with a still accommodative Federal Reserve, the markets have had a very positive start to the year. We still have a number of wild cards for investors to watch, such as: • The European sovereign debt situation • The dollar’s movements and the impact on our import/export markets • Commodity prices, especially oil and other manufacturing inputs and the ultimate impact on inflation • The Fed’s ability to continue its balancing act between promoting economic growth and the potential pressure for higher future inflation As always, we will continue to monitor developments closely and make appropriate portfolio adjustments to best take advantage of the opportunities in the markets. One of Indiana’s Oldest & Largest Independent Trust Companies Applications are Available Online for 3 College Scholarships Indiana Trust Celebrates 10-Year Anniversary by awarding a total of $26,000 in scholarships Indiana Trust & Investment Management Company announces Applications for the Indiana Trust and Investment Management that applications are available for three scholarships in the east Company scholarships are available through the offices of east central Indiana area (defined as Blackford, Delaware, Grant, central Indiana high school guidance counselors or by calling Henry, Jay, Madison, Randolph or Wayne counties). Coles Marketing Communications at 317-571-0051. They are One $1,500 scholarship will be awarded to an east central Indiana also available online at www.indtrust.com/resource_center/ scholarships01.php. high school senior accepted and enrolled at Anderson University for the 2011-2012 school year. “We developed the scholarships to reward the hard work of One $1,500 scholarship will be awarded to an east central Indiana students planning to attend Anderson University, Ball State University or Ivy Tech,” states Ted Jarvis, senior vice president/ high school senior accepted and enrolled at Ball State University senior portfolio manager for Indiana Trust and Investment for the 2011-2012 school year. Management Company. “After we award the scholarships this One $1,000 scholarship will be awarded to an east central Indiana June, the grand total will amount to $26,000 that Indiana Trust senior accepted and enrolled at Ivy Tech Community College has awarded to deserving students.” (Muncie, Anderson, Marion or Richmond campuses only) for the For more information regarding the Indiana Trust and 2011-2012 school year. Investment Management Company Scholarships, contact the Deadline for all three scholarships is March 25, 2011. office of an east central Indiana high school guidance counselor, or call (317) 571-0051. Candidates must be Indiana residents who are currently enrolled in the senior class of an east central Indiana high school. ITC_Winter_11.indd 2 The Indiana Trust Adviser is published four times a year. All articles contained herein are solely for general information purposes, and are not to be construed as legal, accounting, or other professional advice. The authors and publisher, accordingly, assume no liability whatsoever in connection with the use of this material. Every effort has been made to ensure this material is correct at the time of publication. 1/24/11 2:04:20 PM