WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
July 17, 2015
After months of twists and turns, Greece and its international creditors agreed on a bailout deal designed to keep the debt-strapped country in the Eurozone. Following a series of last-minute negotiations, the Greek government agreed to enact measures that include significant pension adjustments and tax increases, stepped-up tax enforcement, and structural economic reforms. In exchange, Greece will receive a €7 billion “bridge” package, followed by an additional €86 billion package, pending further negotiations.
Buoyed by the news out of Greece and better-than-expected economic data from China, the S&P 500 Index rose 2.3% for the week through July 16 before giving back some gains on July 17. The week’s solid performance was also supported by a promising start to the second-quarter corporate earnings season. So far, earnings are on track for a 3% gain, versus expectations for a 5% decline. In Europe, the STOXX 600 Index surged 4.4%, its best weekly advance in six months.
Chinese stocks enjoyed a relatively quiet week amid an easing of some of the government’s recently imposed trading restrictions, which were intended to halt a sharp selloff in domestic equity markets that began in June. Meanwhile, China reported GDP growth of 7% compared to the same period a year ago. A reacceleration in China could boost other emerging-market Asian economies, which have lagged.
Disappointing retail sales data helped push long-term U.S. Treasury yields lower. (Yield and price move in opposite directions.) After beginning the week at 2.42%, the bellwether 10-year yield dropped to 2.35% during afternoon trading on July 16. In her semiannual testimony before Congress, Fed Chair Janet Yellen reiterated her view that the Fed will begin to raise rates this year if economic indicators warrant. Markets took this news in stride, perhaps comforted by previous Fed assurances that the pace of hikes will be gradual, or optimistic that economic weakness could delay rate “liftoff’ until next year.
Most U.S. “spread” products (higher-yielding, non-U.S. Treasury securities) performed well, as positive headlines out of Greece and China led to increased risk appetites.
With Greece likely to fade from the headlines for the time being, markets can once again shift their attention to Eurozone’s economic fundamentals, which we believe are poised to improve heading into the second half of the year. Encouraging signs include a pickup in auto registrations, along with positive job outlooks and expectations for increased capital expenditures in the region’s “Big Four” economies (Germany, France, Italy, and Spain). On the other hand, Eurozone corporate earnings revisions have been disappointing, and the Citi Economic Surprise Index has leveled off after rising in May.
It is too soon to tell whether the decision to keep Greece in the Eurozone was the “right” one. In some ways, agreeing to the deal may be the easiest part of this drawn-out process for Greece and its European partners. Harsh reforms must be implemented, which carry their own political and economic risks. Longer-term concerns include reconciling the divergent views between hard-line Germany and more accommodative France, and the need for further fiscal and monetary integration. For now, at least, the parties have demonstrated the determination to keep the union together.
As for the Fed, a September rate hike remains in play, although we believe the odds favor a December move. Our current forecast is for a 1% annual increase in the fed funds rate through 2017, but these moves will be highly data dependent.
In U.S. equity markets, our year-end target remains 2,300 for the S&P 500, while we view fixed income as reasonably priced at current spreads and interest-rate levels. As events in Greece and China become less prominent, bond markets will once again turn their attention to upcoming data releases, the timing and pace of Fed tightening, and Europe’s growth trajectory.
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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