WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA ASSET MANAGEMENT
November 26, 2014
As the Thanksgiving holiday approached, U.S. equities continued their climb in very light trading. Foreign equity markets were also generally positive. In the U.S., equity markets have been supported by declining oil prices that have lowered energy costs for consumers and businesses in the second half of the year. As of November 26, it was still not clear whether OPEC would decide to cut production and boost prices.
The 10-year Treasury yield drifted down during the holiday-shortened week, ending at 2.27% on November 25, its lowest close for the month to date, and trading lower early the next day. For most of November, the yield on this bellwether security has stayed in a range between 2.28% and 2.38%. Meanwhile, sovereign debt yields in Germany, Italy and Spain remain at or near historic lows in anticipation of aggressive monetary easing by the European Central Bank (ECB).
The government raised its estimate of third-quarter GDP growth from 3.5% to 3.9%—an upbeat report that defied consensus expectations of a downward revision to 3.3%. Details of the report showed that consumer spending, business investment in equipment, and inventory growth were all stronger than first reported. Export growth, however, was weaker.
Other data released during the week was mixed to slightly negative, including:
Outside of the U.S., we see some encouraging signs, tempered by potential risks:
Looking ahead, as the S&P 500 Index approaches the 2,100 level, we should see some sort of correction to reset extremely elevated optimistic sentiment. Such a pullback would present a buying opportunity, as we think 2,150 is the next target for the S&P 500 in 2015.
On balance, both equity and fixed-income markets are behaving as we would expect as Federal Reserve tightening nears: spreads on corporate bonds (both investment-grade and high-yield) have widened relative to Treasuries, and large-cap equities are leading small-cap shares. The S&P 100 Index of large-cap stocks, for example, has gained more than 13% year-to-date, while the small-cap Russell 2000 Index is up only a little more than 3%.
In fixed-income markets, there are effectively only two to three active trading weeks left in 2014, as issuers are mostly funded for the year and secondary trading will occur on thin volumes. Next week, markets will take cues from the November monthly payrolls report, and from the results of “Black Friday” retail spending.
The next Weekly Market Update will be published on Friday, December 5.
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.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
Please note that equity and fixed income investing involve risk.
© 2014 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017