Volatility returned to the markets in January, taking the investors on a wild ride that concluded with handsome gains for stocks and a nail-biting slide for bonds.

At the beginning of the month, stocks were off to races. But they soon ran into strong headwinds as blue-chip profit warnings began to disappoint and concerns over Iran’s renewed nuclear ambitions mounted. Reports that GDP only grew at an annual rate of 1.1% in the fourth quarter further encouraged the markets to put on the brakes. Just when the carnage seemed over, the S&P 500 suffered a drop of nearly 2% amid weak earnings and higher energy prices.

Small caps shone the brightest in January, out-performing large cap stocks by a huge margin as the Russell 2000 index finished the month up nearly 9%. Most likely, this was an example of the January Effect, in which small caps that have had a down year tend to be aggressively sold in December to generate losses to offset capital gains tax liability. The removal of downward pressure abates in January causing small caps to appreciate.

For the most part, bonds seemed to react counter to equities ?? 1/2 falling on the stock market’s good fortune and rallying on the setbacks along the way. Toward the end of the month, bonds were severely punished as stocks staged a bold comeback. Meanwhile, high yield corporate bonds steadily appreciated throughout the month as credit spreads continued to narrow.

All told, this “best of all worlds” scenario resulted in great returns for diversified investors. As the year progresses, we expect to see large caps regain ground against their smaller counterparts, and as the Fed marks the eventual end of its hawkish interest rate regime, a better environment for fixed income.

The Monthly Index Report for February 2006

Index

Jan-06

QTD

YTD

Description
S&P 500 Index*

2.55%

2.55%

2.55%

Large-cap stocks
DJIA*

1.37%

1.37%

1.37%

Large-cap stocks
Nasdaq Comp.*

4.56%

4.56%

4.56%

Large-cap tech stocks
Russell 1000 Growth

1.76%

1.76%

1.76%

Large-cap growth stocks
Russell 1000 Value

3.88%

3.88%

3.88%

Large-cap value stocks
Russell 2000 Growth

9.65%

9.65%

9.65%

Small-cap growth stocks
Russell 2000 Value

8.27%

8.27%

8.27%

Small-cap value stocks
EAFE

6.15%

6.15%

6.15%

Europe, Australasia & Far East Index
Lehman Aggregate

0.01%

0.01%

0.01%

U.S. Government Bonds
Lehman High Yield

1.60%

1.60%

1.60%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

0.73%

0.73%

0.73%

Managed Futures
3-month Treasury Bill

0.29%

All returns are estimates as of January 31, 2006. *Return numbers do not include dividends. ** Returns are estimates as of January 30, 2006.