WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA ASSET MANAGEMENT
October 16, 2015
Global equity markets enjoyed a second straight positive week. In the U.S., the S&P 500 Index edged 0.5% higher, bringing its October return to 6%. The index’s 1.5% gain on October 15 alone was notable, as this solid performance occurred despite a down day for oil and commodities—a signal that investors are perhaps becoming less fearful of a slowdown in China and are beginning to focus on improving U.S. economic activity and corporate earnings.
In Europe, the STOXX 600 Index finished the week up 0.3% in U.S. dollar terms (0.1% in local terms). With profit margins in Europe still offering plenty of room for expansion, we believe stocks there have more upside than U.S. shares. Meanwhile, Chinese equity markets surged despite reports of slowing trade and weak inflation, as investors cheered the introduction of fresh stimulus plans from Beijing and the prospects for additional government intervention.
William Riegel, Chief Investment Officer, TIAA Investments
U.S. Treasuries rallied on mixed economic releases and, no less importantly, a market view that the Federal Reserve may wait until 2016 to raise interest rates. The yield on the bellwether 10-year U.S. note, which began the week at 2.12%, dipped to 1.99% on October 14—an almost six-month low—before touching 2.03% on October 16. (Yield and price move in opposite directions.)
The possibility of a delay in Fed rate “liftoff” helped stabilize “spread” sectors (higher- yielding, non-U.S. Treasuries), whose returns were broadly positive for the week, although investment-grade corporate bonds realized a modest loss. Fund flows into high-yield and emerging-market debt reached their highest levels in five months.
The past week’s slate of data releases showed additional signs of labor-market strength and a notable pick-up in consumer prices compared to a year ago. Among the reports:
For U.S. stocks, October’s rally appears to confirm our view that the August-September downdraft was a correction and not the beginning of a bear market. We believe the pullback was rooted in sharply declining oil-patch activity, inventory “destocking” from the second quarter, and headwinds from a rising dollar, all of which are effects that should begin to ebb.
Technical indicators suggest the S&P 500 may move higher from here: Investor sentiment remains firmly negative, and the index breached its 60-day moving average on October 14—two signs of a possible further advance. Our outlook is also supported by corporate earnings that, while not robust, have been encouraging. With roughly 10% of companies reporting, almost 80% have beaten estimates. Strong earnings are essential to underpinning a fourth-quarter rally. That said, we are still cautious about a number of issues, including the potential for a U.S. government shutdown and heightening tensions in the Middle East.
In fixed-income markets, we believe that investment-grade and high-yield corporate bonds are priced fairly, with default risk staying low and any Fed rate hike likely to be modest (even in 2016). Additionally, the modest but directionally positive trend in oil prices continues to bolster beaten-up energy, gas, and commodities companies. While fears of a deceleration in China seem to have abated slightly, key Chinese economic releases next week could have implications for bond markets.
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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