William Riegel, Chief Investment Officer TIAA Public Investments
July 29, 2016
The S&P 500 Index edged sideways during the week, taking a breather after rising from June’s post-Brexit lows. Better-than-expected corporate earnings, along with a series of upward earnings revisions, helped the index return about 3.7% in July.
Europe’s broad STOXX 600 Index gained 0.5% (in local currency terms) for the week, capping its best one-month return (+3.6%) since October. For the Eurozone, second-quarter GDP growth (+0.3%) was in line with expectations, but on a yearly basis, the region topped forecasts by expanding at a 1.6% clip, the likely result of accelerating economic activity from Germany and little or no Brexit-induced weakness outside of the U.K. In addition, the Eurozone’s preliminary inflation reading for July was a better-than-expected +0.2%, and economic sentiment improved.
William Riegel, Chief Investment Officer, TIAA Investments
In Asia, the Bank of Japan (BoJ) failed to impress markets by declining to cut its benchmark lending rate of -0.1% and leaving unchanged its yearly target of buying ¥80 trillion (about $770 billion) of Japanese government bonds. The BoJ did, however, commit to raising its annual purchases of exchange-traded funds from ¥3.3 trillion to ¥6 trillion and left open the possibility of further monetary easing at its September meeting. Japan’s Nikkei 225 Index lost about 0.3% (in local currency terms) for the week. Chinese equities fell about 1%, while more broadly, emerging-market shares continued to rally. Year to date through July 28, the MSCI Emerging Markets Index has gained 12%.
Current updates to the week’s market results are available here.
Returns for non-Treasury “spread” sectors were broadly positive amid falling Treasury yields and the ongoing global search for income. Strong demand for higher-quality, higher-yielding assets, coupled with the week’s declining oil prices, weighed on high-yield corporate bonds, which are still up over 12% year to date through July 28.
Among the week’s other releases:
Meanwhile, emerging-markets equities offer significant opportunities, in our view. Currencies across the developing world are strengthening, valuations are attractive, and profit margins are well below their peaks reached before the 2008 financial crisis.
While we remain constructive on U.S. equities, there are some signals that bear watching. On one hand, hedge funds have begun to increase their net equity exposure to U.S. stocks, which indicates a lessening in their bearish disposition. That said, other measures of investor sentiment are still negative― reassuring contrarian indicators that often presage a market upturn. Also of concern is the dollar’s recent strengthening. This may put pressure on U.S. corporate earnings and has contributed to weakness in oil prices, a condition we believe is temporary. If our view proves correct, we anticipate better equity returns, in line with our expectation for the S&P 500 Index to move higher by year-end.
Given the length of the rally among fixed-income “spread sectors,” we believe it is prudent to pare risk and focus on higher-quality assets. We are also further diversifying our portfolios, focusing on less-correlated sectors such as municipal bonds, asset-backed securities, emerging-markets debt (both sovereign and corporate) and U.S. corporate bonds, which remain especially attractive on a relative basis.
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.
© 2016 Teachers Insurance and Annuity Association of America (TIAA), 730 Third Avenue, New York, NY 10017