WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA ASSET MANAGEMENT
January 29, 2016
Global equity returns were broadly positive for the second week in a row, with U.S. and foreign markets rallying on the Bank of Japan’s (BoJ’s) surprise move to lower the rate it pays on excess reserves into negative territory (-0.1%). The unexpected action marked the Japanese government’s latest attempt to jumpstart inflation and boost the country’s flagging economy.
Also lending support to markets was a rebound in oil prices amid speculation that Russia and OPEC may be entering discussions for a coordinated cut in production. On the U.S. economic front, GDP growth slowed in the fourth quarter, but markets were relieved that the degree of deceleration was in line with expectations.
After closing as low as 1,859 in recent weeks, the S& P 500 Index reclaimed levels well above 1,900 and finished the week with a gain of 1.7%. Europe’s STOXX 600 Index climbed about 1.2%. In Japan, the Nikkei 225 Index’s more than 3% rise for the week helped lift many other Asian markets. Even Chinese equities rallied on January 29, though not enough to push into positive territory for the week.
William Riegel, Chief Investment Officer, TIAA Investments
Current updates to the week’s market results are available here.
U.S. Treasuries rallied on the week, even as equities and oil prices climbed. The 10-year Treasury yield began the week at 2.06% and closed at 1.92% on January 29. (Yield and price are inversely related.) Driving the decline in yields was dovish language accompanying the Federal Reserve’s January 27 announcement that it was holding rates steady, and that the pace and scope of future rate hikes would reflect global economic developments as well as the usual domestic metrics. Treasuries also benefited late in the week on the heels of the BoJ’s rate cut, which boosted the dollar and made U.S. assets more attractive.
Based on Barclays indexes, non-Treasury markets also produced generally positive returns for the week, with spreads improving as many of the risks now facing the market appear to be priced in. High-yield bonds in particular were notable for realizing gains for the first time in three weeks.
As expected, GDP growth in the U.S. fell to an annualized rate of 0.7% in the fourth quarter of 2015, according to the government’s advance estimate. Consumer expenditures held up, driven by spending on services. In contrast, spending on durable goods (such as aircraft, machinery, computer equipment, and other big-ticket items) was lackluster. Inventory and capital spending was also weak. A potential silver lining in the GDP data is that it suggests inventory levels will soon run low, implying an increase in inventory spending in the next quarter or two.
Among the week’s other data releases:
After the Fed’s latest statement, we anticipate a halt in further rate hikes until economic measures and financial markets improve further. As usual, the Fed will leave the door open to raising rates based on incoming data, but given muted wage growth, inflation, and other economic variables, it’s doubtful we’ll see another move before the second half of this year at the earliest. We now expect only one rate hike in 2016, based on the current direction of growth.
Meanwhile, the BoJ’s negative rate policy demonstrates how concerned the Abe administration is about the lack of progress being made to reinflate the Japanese economy. Whether Japan’s surprise move represents the beginning of the next round of global monetary easing remains to be seen, but we do think it increases the likelihood—and scope—of another boost to quantitative easing by the European Central Bank. While further easing will please markets, it also indicates that central bankers are having to resort to ever-more expansive stimulus efforts to have a meaningful impact.
Against this backdrop, global equity markets appear to be finding stability after what has been a painful start to the new year. In our view, the worst of the downdraft may be behind us, and the next move for the markets should be up. A number of factors support this view:
That said, any market recovery to new highs will likely occur in a slow and choppy “stair step” trajectory. Moreover, global economic and geopolitical risks remain and bear watching.
In fixed income, we see the potential for reduced volatility as investors appear to be more comfortable with the current state of global affairs. We believe credit risk in investment-grade corporate bonds, as well as higher-quality high-yield bonds and loans, currently represents fair value. Inflation risks remain low, providing a tailwind to credit markets generally. In emerging markets, spreads have benefited from the likelihood of slower rate moves by the Fed.
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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