WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA ASSET MANAGEMENT
October 9, 2015
The first full week of October brought better news to global equity markets. In the U.S., the S&P 500 Index gained 3.3%— its best weekly performance in 2015, bringing its month-to-date return to 5%.
In Europe, the STOXX 600 Index extended its winning streak to six days, returning 5.1% for the week in U.S. dollar terms (4.3% in local currency terms). Investors digested some mixed economic data, including an unexpected slowdown in German exports and a fifth straight month of rising Eurozone retail sales, the longest such streak since 2006. Meanwhile, Chinese equity markets notched gains on October 8 and 9 after being closed for a week due to a national holiday.
William Riegel, Chief Investment Officer, TIAA Investments
U.S. Treasury yields rose as the prior week’s “risk-off” sentiment faded, with the yield on the bellwether 10-year note reaching 2.10% on October 9. (Price and yield move in opposite directions.) High-yield bonds were notable beneficiaries of the better mood, bolstered by a rebound in oil prices. Fund flows across most fixed-income categories were mixed for the week but remain significantly negative year to date.
In a week with few data releases, U.S. labor markets showed continued signs of strengthening. Among the reports:
The S&P 500 Index broke through several key technical levels on October 8 and finished above the key 2,000 level for the first time since August 20. This move reinforces our belief that the index is beginning a new uptrend; that said, favorable corporate earnings guidance and economic data releases will be essential to underpinning a meaningful advance from here.
Importantly, the price of oil and other commodities has begun to rebound, and the Energy and Materials sectors performed much better in the past week—all of which could lend a firmer tone to growth prospects. If these trends continue and there is broad-based improvement in commodity prices, we could see the S&P 500 returns to its previous highs. While this is not a consensus view, it’s supported by current levels of extremely bearish sentiment, which often presages a rise in equity prices.
There a few caution flags that we are actively monitoring. These include the recent widening in credit spreads, third-party company surveys that have moved sideways after a period of weakness, and weaker U.S. economic releases accompanied by reduced inflation expectations. While we believe these are backward-looking signals that triggered the recent market volatility, they should reverse in order to support a fourth-quarter market advance.
In fixed-income markets, investors await direction from upcoming economic releases out of China and third-quarter earnings reports from U.S. companies. Volatility may increase against the backdrop of a possible debt-ceiling debate in Congress, which still looms, or a potential government shutdown. We currently see greater value in U.S. high-yield bonds compared to emerging-markets debt, as the prospect for rising rates at home—even if the Fed doesn’t tighten until 2016— is likely to trigger outflows from the developing world.
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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