William Riegel, Chief Investment Officer TIAA Public Investments
May 13, 2016
Global equity markets struggled to gain traction this past week, as investors confronted two familiar foes: oil price choppiness and lackluster corporate earnings releases.
In the U.S., better-than-expected consumer data released on May 13 failed to provide support for markets. After posting its best one-day gain (+1.3%) in two months on May 10, the S&P 500 Index fell for the next three days, extending its two-week losing streak by declining about 0.5% for the week.
European stocks rose in the wake of the positive U.S. data, with the broad STOXX 600 Index gaining 0.9% in local currency terms, its first one-week advance since late April. Economic news showed that Eurozone GDP grew at a slightly slower pace (+0.5%) than first estimated during the first three months of the year, even as Germany—the region’s largest economy—expanded at its fastest pace (+0.7%) since 2014.
William Riegel, Chief Investment Officer, TIAA Investments
In Asia, Chinese equity markets slumped on concerns over the country’s economic growth, while Japan’s export-heavy Nikkei 225 Index, bolstered by a declining yen versus the U.S. dollar, returned 2.1% in local currency terms.
Current updates to the week’s market results are available here.
U.S. Treasuries rallied during the past week, as mixed global economic releases led to a modest uptick in demand for safe-haven assets. The bellwether 10-year note, which began the week at 1.79%, drifted down to 1.70% on May 13. (Yield and price move in opposite directions.)
Returns for non-Treasury “spread sectors” was mildly but broadly positive for the week through May 12. High-yield bonds overcame continued outflows to post a solid 0.53% gain. This asset class is up almost 7.0% year to date, but persistent negative flows may trim that return in the coming weeks.
In a relatively light week for U.S. data releases, consumers showed renewed optimism and a willingness to spend, two signs that the economy may be regaining some momentum after growth nearly stalled in the first quarter.
Among the week’s reports:
The fundamentals for fixed-income assets remain reasonably supportive: the Fed is unlikely to raise rates quickly, quantitative easing by global central banks will continue to provide liquidity, and corporate default rates (outside of the energy sector) are still historically low. Against this backdrop, we don’t believe credit spreads will widen dramatically.
Meanwhile, the recent decline in U.S. equities, which are now off more than 3% from their April highs, may represent the beginning of the correction we have been expecting. Moreover, global markets are facing many potential headwinds, including upcoming elections in the U.S. and Spain, the “Brexit” vote, oil volatility, and movements in the dollar.
We are also increasingly concerned about renewed softness in Chinese economic activity and recent weakening in the yuan. As we saw last August and once more in January, the equity market could become vulnerable to further downside volatility if the yuan weakens again. If that were to happen, spreads across a wide range of fixed-income asset classes could widen. We would consider pullbacks in both the fixed-income and equity markets to be buying opportunities.
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.
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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