William Riegel, Chief Investment Officer, TIAA Investments
December 2, 2016
All eyes will soon turn to the Federal Reserve’s December meeting for a widely expected increase in short-term interest rates. During the past week, however, surging oil prices commanded attention following a November 30 agreement by the world’s largest oil producers to reduce output in a bid to reduce global oversupply. In response, oil prices rose more than 11% for the week (to about $51 barrel). Also in the spotlight were several key U.S. data reports, including the December 2 release of November’s U.S. nonfarm payrolls report.
In the U.S., the S&P 500 Index fell about 1% for the week after notching a fresh record high on November 25. Thanks to a post-election rally in which it gained 2.6% through the end of November, the S&P 500 returned 3.7% for the month as a whole.
Europe’s broad STOXX 600 Index also lost ground in the past week (0.9% in local terms), ending a three-week winning streak. Investors remained cautious ahead of Austria’s presidential election and Italy’s constitutional referendum, both scheduled for December 4. In the Eurozone, economic releases for November were encouraging: unemployment dipped below 10% for the first time since 2009; economic confidence improved to an 11-month high; and the manufacturing sector expanded at its fastest rate in almost three years, supported by a weaker currency and improving demand.
Current updates to the week’s market results are available here.
Returns for non-Treasury “spread sectors” were mostly negative. High-yield corporate bonds bucked that trend, supported by higher oil prices.
Among the week’s other releases:
But there were some soft spots in the report. For example, the average workweek did not change, and average hourly wages in November fell 0.1%. Moreover, while the unemployment rate hit a nine-year low of 4.6%, that drop was mostly due to some 400,000 unemployed people leaving the workforce.
In fixed-income markets, we think higher-quality floating-rate loans offer value given their reduced interest-rate sensitivity in what will likely be a rising-rate environment. We also favor select emerging-market (EM) debt opportunities, as many of these bonds have struggled since the election amid higher rates and a stronger dollar. In our view, much of the risk to this asset class has been priced in, and many EM countries could benefit from improved U.S. growth. Higher-grade, shorter-dated asset-backed securities should also perform relatively well. We expect volatility to persist in 2017, offering opportunities for active managers to buy bonds at attractive prices.
Following the post-election rally, we believe the S&P 500 has now reached a level at which a sharp correction is possible. First, market odds for a December Fed rate hike are at or near 100%. Additionally, fueled by rising inflation expectations, Treasury yields may well rise further, making stocks relatively less attractive compared to bonds. Lastly, investor sentiment has reached very bullish levels, a contrarian indicator that has often presaged an equity pullback. Despite these headwinds, we have maintained our S&P 500 target of 2,400 by the end of 2017, led by small caps, financials, and cyclical stocks.
© 2016 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA), 730 Third Avenue, New York, NY 10017
TIAA Global Asset Management provides investment advice and portfolio management services through TIAA and over a dozen affiliated registered investment advisers.