TIAA Global Asset Management

Caution weighs on global equity markets as the Fed comes into focus

William Riegel, Chief Investment Officer TIAA Investments

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September 16, 2016

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Equities

Global equities endured a volatile week, as investors assessed conflicting comments from Fed officials regarding the possibility of the central bank raising interest rates at its highly anticipated September 20-21 meeting. Wide swings in oil prices added to the uncertainty. 


In the U.S., the S&P 500 Index appears to have fully awakened from its summer slumber. In a week that saw back-to-back one-day returns of 1.47% and -1.45%, the index gained 0.5%. Europe’s broad STOXX 600 Index declined 2.2% (in local currency terms), its poorest one-week showing in three months. Japanese stocks also stumbled, with the Nikkei 225 Index falling 3% (in U.S. dollar terms) for the week through September 15, as investors braced for the Bank of Japan’s next policy meeting, which coincides with the Fed’s.

William Riegel, Chief Investment Officer, TIAA Investments

Bill


Article Highlights

Current updates to the week’s market results are available here.

Fixed income

A change in sentiment driven by the potential for higher rates has affected global markets, as evidenced by rising long-term government bond yields in Europe and the U.S. After beginning the week at 1.67%, the yield on the bellwether 10-year U.S. Treasury rose to 1.73% on September 13, its highest level since early June, before closing at 1.69% on September 16. (Yield and price move in opposite directions.) 


Returns for non-Treasury “spread” sectors were broadly negative for the week through September 15.

A lackluster week for U.S. data releases

During the past week, more assuring data from the U.S. labor market was tempered by disappointing small business sentiment and retail sales. The manufacturing sector also showed signs of struggling, while consumer prices rose more than expected. Among the reports:

Lastly, as reported by the U.S. Census Bureau, real median household income surged 5.2% from 2014 to 2015, its first annual increase since 2007.

Outlook

For the U.S. economy, we expect third-quarter GDP to come in at 2% or slightly higher. (The government’s advance estimate will be released on October 28.) As long as businesses continue to hire, wages and consumer demand should follow. That means the economy could continue to post growth rates above 2% going forward, but 3% or higher is unlikely.  


In fixed-income markets, we still believe high-grade corporate bonds offer reasonable value and should offer some principal protection if rates do indeed rise, given the asset class’ reduced sensitivity to interest-rate changes. The opportunity to buy riskier assets such as lower-quality high-yield corporate bonds, emerging-market debt denominated in local currencies, and lower-rated structured credit may improve in the coming months. Also looking ahead, volatility in fixed-income prices, credit spreads, and U.S. Treasury yields are likely to pick up should we see increased geopolitical uncertainty and inconsistent economic releases. Markets will likewise be influenced by central banks, starting with the upcoming Fed and Bank of Japan policy meetings.

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