WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA-CREF ASSET MANAGEMENT
February 26, 2016
Oil remained the dominant driver of market activity during the past week. Despite sharp day-to-day volatility, the price per barrel rose about 3% for the week as a whole, supporting major equity indexes.
In the U.S., the S&P 500 Index rose about 1.6% for the week. Value, energy, and consumer cyclical shares continued to rebound, providing evidence of the economy’s resilience after its slowdown in the second half of last year.
The U.S. rally was mirrored by overseas markets. Europe’s STOXX 600 Index advanced 1.6%, and Japan’s Nikkei 225 Index rose about 1%. However, Chinese equities could not overcome a 6.4% plunge on February 24 amid heightened worries about market liquidity. In China, the government is increasing deficit spending to stabilize growth, which may have contributed to recently higher commodity prices; iron ore, for example, has rallied 35% since hitting a bottom. At the same time, slowing jobs growth in China is eroding consumer confidence, and Beijing is still struggling to contain capital flight.
William Riegel, Chief Investment Officer, TIAA Investments
Current updates to the week’s market results are available here.
U.S. Treasury yields stayed mostly rangebound. The bellwether 10-year yield headed lower to 1.71% on February 25 before closing at 1.75% the next day—roughly where it began the week. (Yield and price are inversely related.) Meanwhile, returns for non-Treasury “spread sectors” were broadly positive, benefiting from the fixed-income market’s generally more positive tone and net inflows. Outperformers included investment-grade and high-yield corporate bonds, which returned 0.84% and 0.61%, respectively, for the week through February 25.
According to the government’s second estimate, U.S. GDP grew at a 1% annual pace in the fourth quarter of 2015. While an improvement over the previous estimate of 0.7%, the revision offered few positive surprises, with little to cheer about in consumer or business spending. All told, we believe the U.S. economy will maintain its slow, steady pace, with GDP growth of about 2% in the first quarter of 2016.
Other U.S. economic releases were mixed:
From a technical standpoint, the S&P 500’s rebound above the 1,950 level after dropping below 1,900 earlier in the week was particularly encouraging. It appears as if the equity market is anticipating stronger economic news, which we saw in the part week’s solid durable goods data, improving third-party company surveys, ongoing resilience in the jobs market, and higher oil prices. Once again, strong U.S. demand for gasoline underpinned oil’s rise. On the down side, manufacturing is still weak and consumer confidence fell. We still think there is scope for the S&P 500 to advance through the 2,100 mark before pulling back again.
A chief concern is the prospect of a substantial currency devaluation by the Chinese government, as markets have often lost steam after such a move. Although Beijing has insisted that no more devaluations are on the horizon, officials have consistently been unable to deliver clear signals to the market. As a result, we take such assurances with a grain of salt. Also on our radar is China’s ongoing battle with capital flight. Global equities may well retreat if the March 7 release of the country’s currency reserves reveals outflows greater than last month’s $100 billion.
In fixed income, markets remain wary of exogenous factors that could weigh on the U.S. economy, including China, oil supplies, and global growth. We are taking a more “credit- centric” approach, focusing on select high-yield bonds (especially those rated BB) and emerging-market debt issued by countries benefiting from lower oil prices. In contrast, neither U.S. Treasuries nor agency mortgage-backed securities offer significant value, in our view. Overall, fixed-income assets continue to take their cues from oil prices and macro events rather than from more U.S.-centric economic data.
TIAA Global Asset Management provides investment advice and portfolio management services through Teachers Insurance and Annuity Association and affiliated registered investment advisors, including Teachers Advisors, Inc., TIAA-CREF Alternatives Advisors, LLC and Nuveen Asset management, LLC.
© 2016 Teachers Insurance and Annuity Association of America (TIAA), 730 Third Avenue, New York, NY 10017