WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
May 15, 2015
U.S. equities rallied in the face of rising interest rates and slower economic data, ending the week on a positive note. The S&P 500 Index notched record closes on May 14 and 15, coming within hailing distance of its intraday high set in late April.
In Europe, stocks rallied as the week wore on, bolstered by the encouraging Eurozone economic GDP report. However, disappointing U.S. data soured the mood as the week came to a close, leaving equities with a modest gain.
Stocks in China rose for the week after the government recently cut interest rates for the third time in six months. The broader emerging markets ticked up for the week through May 14, and for the year are up almost 9% (according to the MSCI index) despite the threat of tightening by the Federal Reserve.
William Riegel, Chief Investment Officer, TIAA Investments
After beginning the week at 2.16%, the yield on the bellwether 10-year U.S. Treasury lifted to an intraday high of 2.36% on May 12 before easing down to 2.23% on May 14. A weak consumer confidence release and soft manufacturing data pushed its yield back down to 2.14% during mid-day trading on May 15.
Meanwhile relative calm returned to Europe following the previous week’s massive sell-off. Eurozone yields rose slightly (driving prices down), a continued reflection of heightened inflation expectations and stronger economic releases.
Returns for Treasuries and “spread products” alike (higher-yielding, non-U.S. Treasury securities) were broadly negative for the week through May 14. Domestic and global demand has fueled fixed-income issuance, especially for longer-dated, investment-grade corporate bonds.
In a relatively light week for U.S. data releases, the strong unemployment report was one of the few bright spots. Among the releases:
For the first time since the first half of 2010, all four of the Eurozone's largest economies (Germany, France, Italy, and Spain) recorded growth, as cheap oil, a weaker euro, and aggressive monetary easing spurred a faster and more evenly distributed expansion. The region as a whole grew 0.4% in the quarter (1.6% on annualized basis), up from 0.3% in the final three months of last year. Spain (+0.9%) led the recovery, while France (+0.6%) expanded at its fastest pace in nearly two years, and Italy (+0.3%) registered its best performance in four years. Germany rose 0.3%, less than forecast, but remains on track to lead the region over the next two years as other countries lag behind on the reforms needed to sustain the recovery.
The fact that cyclical stocks, a bellwether for a strengthening economy, continue to outperform and commodities prices are lifting, supports the view that we are entering a period of normalized global growth. In that case, we would expect higher U.S. yields by year end. A rising-rate environment, accompanied by better prospects for growth and expectations for “good” (i.e., steady, moderate) inflation, could underpin additional gains for U.S. stocks, especially given their attractive expected returns relative to bonds.
Now that overly optimistic trading sentiment—often an impediment to a sustainable market advance—has cooled in Europe, we believe stocks there are poised to lead. Although valuations are no longer cheap, we believe that better economic activity will lead to higher return on equity. That, in turn, would imply a much higher level of earnings.
With bond prices falling, credit fundamentals for most issuers remaining sound, and the risk of recession remote, we believe the broad fixed-income market is fairly valued. Within high yield, we believe bonds rated B and BB offer superior value to speculative issues (those rated CCC). Outside of developed markets, we continue to favor exposure to “frontier markets” such as Nigeria and Serbia, fast-growing countries that are less economically developed than the broader set of emerging markets. These bonds offer potentially attractive returns that are often less correlated to emerging- and developed-markets debt.
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.
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