WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA ASSET MANAGEMENT
October 30, 2015
U.S. and European equity markets sought to extend their four-week winning streaks in the face of a possible December rate hike by the Federal Reserve. In the U.S., the S&P 500 Index rose about 0.2% for the week though afternoon trading on October 30, extending its October surge to 8.5%. Despite returning -0.60% in local currency terms for the week (-0.36% in U.S. dollars) the STOXX 600 Index was on pace for its first positive month since June.
Meanwhile, economic news continued to show that the Eurozone’s recovery remains on track. Unemployment fell to its lowest level in almost three years in October, and measures of business and consumer confidence reached a more than four-year high. While headline inflation came in flat for the year through October, “core” inflation, which strips out volatile food and energy costs, rose a better-than-expected 1% over the past 12 months.
William Riegel, Chief Investment Officer, TIAA Investments
Chinese equities declined for the week, but their solid advance in October ended a string of four straight down months. The recovery in China seems to be taking hold, as evidenced by rising property prices, and stronger retail and vehicle sales.
In its latest policy statement, the Fed dropped previous references to the risks that global economic and market weakness pose to the U.S. economy. This change in language was perceived by the market as “hawkish,” helping to drive the yield of the bellwether 10-year U.S. Treasury from 2.09% at the start of the week to 2.19% following the conclusion of the Fed’s meeting on October 28, before moving slightly lower on October 30. (Yield and price move in opposite directions.) The yield on the two-year Treasury note, which is highly sensitive to changes in the Fed's rate policy outlook, jumped from 0.66% to 0.73% during the week.
Returns for spread sectors (higher-yielding, non-Treasury securities) were broadly negative, although high-yield corporate bonds posted only a modest loss. For the month through October 29, high-yield debt, which tends to perform in sympathy with equities, returned 2.75%.
Third-quarter GDP grew at a 1.5% annual rate, according to the government’s advance estimate―slightly below forecasts, including our own. There were bright spots heading into the fourth quarter, though: Consumers and businesses largely maintained their robust pace of spending from the second quarter, when the U.S. economy grew at a healthy 3.9% clip.
Other U.S. economic releases were mixed. Among the mostly positive reports:
Among the weaker releases:
For the U.S. economy, it is clear that consumption and business spending have increased, both of which are signals of ongoing strengthening in labor markets and wages. Meanwhile, overall economic growth continues at about the same restrained pace of 2%-2.5%. Looking ahead, wages should improve in the near term, underpinning further gains in consumption over the next few quarters and driving a modest acceleration in GDP in the fourth quarter and 2016.
In terms of the Fed, we still believe that it is waiting for inflation to pick up—even marginally—before raising rates for the first time since 2006. In our view, the Fed believes signs of pricing pressures may soon appear, paving the way for tightening to begin in December. Once rate “liftoff” begins, future hikes should be slow and measured, limiting their effect on longer maturity bonds.
Regarding U.S. equities, the market’s mood has improved amid dissipating fears over a so-called “hard landing” in China, hints of further quantitative easing by the European Central Bank, and the anticipation of better U.S. economic growth. Against this backdrop, investors rotated into value and economically sensitive sectors, which were supported by steadily improving regional manufacturing indexes and a better-than-expected third-quarter earnings season that saw the majority of companies' top forecasts. These cyclical and value stocks have begun to outperform, a trend we think may continue into 2016.
In U.S. fixed-income markets, we believe high-yield bonds offer reasonable value even after their recent rally, as default risks remain low. For investment-grade corporate debt, mergers & acquisition risks are still elevated, emphasizing the importance of prudent security selection.
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.
© 2015 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017