William Riegel, Chief Investment Officer TIAA Investments
October 14, 2016
In the U.S., the S&P 500 Index lost about 1.0% for the week, its second consecutive one-week decline. European equities, meanwhile, eked out a 0.1% gain (in local currency terms), after falling to a two-month low on October 13.
In Asia, China’s exports fell in September by 10% from a year earlier, following a 2.8% year-over-year contraction in August. Imports also declined in September, by 1.9%. In a bit of positive news, however, stronger-than-expected inflation data eased some concerns about the health of the world's second-largest economy. For the week, Chinese equity markets rose by about 1%, while Japan’s Nikkei 225 Index was down slightly.
William Riegel, Chief Investment Officer, TIAA Investments
Current updates to the week’s market results are available here.
Returns for non-Treasury “spread sectors” ranged from slightly negative to modestly positive for the week through October 13, with investment-grade (IG) corporate bonds leading the way. The potential for higher yields is particularly valuable to banks and financial companies, which make up a significant portion of IG issuance. That is because rising rates tend to widen the gap between what banks charge on loans and what they pay for deposits.
As for the Fed, investors will remain in suspense until December, although we still expect a 25 basis point (0.25%) increase in the benchmark fed funds rate. If such a move is followed by a series of gradual rate hikes, markets should be able to adjust accordingly, absent exogenous shocks.
In fixed-income markets, overseas demand for IG bonds may subside somewhat as interest rates rise in Europe. At the same time, demand for these securities may hold up better than that for U.S. Treasuries; the higher yields available on IG debt help cover the costs of hedging dollars into local currencies. Meanwhile, with default levels near cyclical lows, we continue to find value in higher-quality high-yield bonds and leveraged loans.
The U.S. economy appears to have accelerated in the third quarter, helped by a more balanced mix of growth than the second quarter’s consumption-driven pickup and steep inventory decline. We still anticipate annual growth in the 2%-2.2% range as the U.S. enters a more mature phase of the economic cycle.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
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