Weekly Market Update
Markets seek direction on
mixed data, Fed uncertainty
WILLIAM RIEGEL, HEAD OF EQUITY INVESTMENTS
LISA BLACK, HEAD OF GLOBAL PUBLIC FIXED-INCOME
MARKETS
ARTICLE HIGHLIGHTS
Equities have a bumpy ride but appear to weather short-term headwinds.
U.S. Treasury yields are volatile, while “spread sectors” tread water.
Housing remains a significant bright spot for the U.S. economy.
Anticipation builds for upcoming Fed and European policy announcements.
A near-term market correction is possible but could be shallow and shortlived.
AUGUST 24, 2012
The U.S. equity market’s summer rally hit some speed bumps during the past
week but appeared to be weathering the volatility heading into the final day of
trading. The S&P 500 Index briefly touched a new intra-day high for the post-2008
financial crisis era on August 21.However, it subsequently gave back gains amid
mixed global economic data and “will they or won’t they?” uncertainty about the
Federal Reserve’s plans for further monetary stimulus. Nonetheless, through
August 23, the S&P 500 remained in positive territory, up 1.9%) for the month to
date and up 7.3% for the period since May 31.
Stocks with the largest market capitalizations, represented by the S&P 100 Index,
have generally led the summer advance. In recent weeks, however, small-cap
stocks have outperformed as investors proved willing to assume more risk.
Meanwhile, European stocks have bested their U.S. counterparts since the end of
May, with the MSCI Europe Index rising 13.8% through August 23. Positive global
equity returns have been driven by improved sentiment regarding Europe,
stronger-than-forecast consumer spending, and hopes that China will take further
decisive action to stimulate its economy.
In fixed-income markets, “spread products”—lower-rated, higher-yielding, nonTreasury securities—took a breather after weeks of strong performance that saw
their prices rise and yields fall. At the same time, the yield on the bellwether 10year Treasury security has been volatile. A few weeks ago, with heightened fears
about Europe’s debt crisis and a marked slowdown in U.S. and global growth
fueling demand for safe-haven assets, the 10-year yield closed at an all-time low
of just over 1.4%. As global economic data strengthened and Europe remained
Markets seek direction on mixed data, Fed uncertainty
relatively calm, the 10-year yield subsequently climbed to 1.86%, only to fall back to
1.68% at the end of trading on August 23. Treasury yield movements bear close
scrutiny not only because of their effect on investment returns, but also because
they serve as barometers of the future direction of markets and economies.
U.S. data spark concerns about Fed’s next stimulus move
U.S. economic releases were mixed during the week. Weekly first-time
unemployment claims rose more than forecast, while headlines about surging
durable goods orders in July tended to downplay signs of weakness in some of the
underlying data. Housing indicators remained decidedly positive:
Existing home sales climbed 2.3% in July and were more than 10% higher
than a year ago;
New home sales jumped 3.6% in July and were revised upward for June;
and
Home prices continued to improve in July, with the national median sales
price for existing homes up 9.4% from a year ago.
On balance, recent U.S. data has been strong, including data on housing, leading
economic indicators, consumer confidence, retail sales, industrial production, bank
loans and other real-time measures of company activity. This has led some to
believe that further monetary stimulus by the Fed is no longer on the table, at least in
the short term. Some Wall Street analysts now see only a 50/50 chance that the Fed
will implement a third round of quantitative easing. This increased pessimism has
emerged despite the release of the Fed’s most recent meeting minutes, which
suggested the growing likelihood of a “substantial” bond purchasing program.
Europe’s economy continues to contract, while Chinese
manufacturing slows
There has been little evidence of economic improvement in the eurozone, where
GDP shrank by 0.2% in the second quarter of 2012, compared with the first quarter,
and by 0.4% versus the second quarter of 2011. Data released during the past week
reinforced the bleak situation: Based on preliminary readings, the composite
Purchasing Managers’ Index (PMI) of eurozone manufacturing and service-sector
activity contracted for the seventh consecutive month in August. Hopes that a
stronger German economy could help lift broader regional economic performance
were unfulfilled, as Germany’s composite PMI decelerated at a faster rate in August
than July and hit a 38-month low.
China’s manufacturing engine also lost horsepower, with its preliminary
manufacturing PMI hitting a nine-month low. Although stronger policy measures to
stimulate growth are broadly expected, weak performance by Chinese stock markets
indicate that such stimulus has yet to enter the system.
All eyes on the Fed and Europe’s policymakers
Equity markets are looking ahead to a number of high-profile meetings at which
major policy decisions may be announced, providing clarity on future stimulus
measures and actions to address Europe’s ongoing debt problems. Remarks by Fed
chairman Ben Bernanke and European Central Bank president Mario Draghi at the
Fed’s upcoming annual summit in Jackson Hole, Wyoming, are among several
Markets seek direction on mixed data, Fed uncertainty
potential triggers of market direction that will take place over Labor Day weekend
and the first week of September.
In the meantime, some indicators suggest that we might see a short-term correction
in equity markets. The “VIX” index (an estimate of stock market volatility) has moved
to a new post-2008 low of 13.3, indicating that investors may have become
complacent. However, the VIX has been known to remain at low levels for extended
periods if—as has been the case for the past several weeks—there are no external
shocks to provoke investor fear. Reinforcing the market’s complacency, some
technical indicators of short-term investor sentiment have turned neutral to bullish,
which could signal that we are due for a pause after the summer rally.
That concern is reinforced by rising commodity prices. Oil is again approaching $100
per barrel, and food prices are poised to soar as the drought takes its toll on U.S.
and South American crops. These anticipated price increases could thwart stronger
global consumer spending, which has been a key component of better-thanexpected economic readings of late. However, the impact of these increases is more
likely to be felt later in the year. As a result, in our view, any near-term market
corrections should be shallow, and stocks may resume their upward movement,
barring renewed panic over Europe).
Fixed-income markets are also preparing for significant post-Labor Day news flow. If
the Fed decides not to intervene on the basis that recent stronger economic
releases make further stimulus unwarranted, we would likely see a back-up in U.S.
Treasury yields. With regard to non-Treasury sectors, additional good economic
news or upside surprises are needed to support a rally in high-yield, investmentgrade corporate, and emerging-market debt securities. On the other hand, we are
likely to see yield spreads widen if no progress is made toward resolving the
European debt crisis, if China’s economy decelerates further, or if U.S. employers
scale back investment in labor and machinery given uncertainty surrounding fiscal
and debt policy ahead of the November elections.
Markets seek direction on mixed data, Fed uncertainty
The information provided herein is as of August 24, 2012.
The material is for informational purposes only and should not be regarded as a recommendation or an
offer to buy or sell any product or service to which this information may relate. Certain products and
services may not be available to all entities or persons.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the
TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management,
LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc., is a registered investment advisor and
wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).
Past performance is no guarantee of future results.
Please note that equity investing involves risk.
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