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WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER
February 19, 2016
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Global equity markets advanced during the past week, as some U.S. economic releases improved at the margin and China’s currency (the yuan) stabilized after the country’s central bank ended weeks of silence by downplaying the need for further yuan weakening. Also supporting the week’s gains was a midweek rebound in commodity prices following an agreement between Russia, Saudi Arabia, and other major oil exporters to freeze output at January’s levels. Oil later retreated to end the week with a modest gain.
In the U.S., the S&P 500 Index reclaimed positive territory in February by rising about 2.9% for the holiday-shortened week, underpinned by its biggest three-day gain since last August. Europe’s STOXX 600 Index was in even better form, surging 4.5% (in local terms), its best week in over a year. In Japan, the Nikkei Index rose 8% (in local terms), erasing much of the previous week’s 11% slide, while stocks in China also rallied.
William Riegel, Chief Investment Officer, TIAA Investments
Current updates to the week’s market results are available .
U.S. Treasuries traded within a relatively narrow range. After beginning the week at 1.74%, the bellwether 10-year Treasury yield rose to 1.81% by midweek amid lessening demand for safe-haven assets before falling to 1.76% on February 19 as investors’ risk appetite faded.
Based on Barclays indexes, returns for most U.S. “spread sectors” (non-Treasury fixed-income assets that include agency, corporate, mortgage-backed, and other types of securities) ranged from mildly positive to slightly negative amid ongoing negative fund flows. High-yield bonds gained almost 2% for the week through February 18, moving in sympathy with higher equity and oil prices.
Regional manufacturing improved slightly but stayed weak, according to the Philly Fed and Empire State manufacturing indexes. In contrast, industrial output topped forecasts by climbing 0.9% in January, the first increase since last July.
The market’s rebound during the past week could be viewed as an indication that U.S. economic conditions are normalizing. At the same time, while we remain optimistic, it’s too early to proclaim an end to the market volatility that has driven the S&P 500 Index down by almost 15% since its May 2015 high. Investors must still grapple with the possibility of further rate hikes by the Federal Reserve and an uncertain U.S. corporate earnings outlook. However, recent declines in market rates have triggered a weaker dollar, which supports both export activity and bolsters S&P earnings.
On another positive note, manufacturing—while still struggling—is showing “green shoots” of recovery, bank loans are rising, and the U.S. labor market continues to be a bright spot. Retail sales data has also shown signs of vigor, although a recent third-party survey of retailers fell sharply, possibly in connection with the sharp stock market sell-off. This again underscores the importance of sentiment to the health of the economy.
In fixed-income markets, volatility has created potential buying opportunities. Our fundamental analysis has identified value on a selective basis in emerging-market debt, high-yield corporate and investment-grade bonds, and structured products such as asset-backed and commercial mortgage-backed securities. Moreover, the environment for finding attractive yield is among the best we’ve seen in recent years, supporting our ability to find compelling returns even if volatility persists and bond spreads don’t tighten.
As for China, we expect that Beijing ‘s attempt to engineer the country’s transition to a consumer-based economy will continue through targeted monetary easing and infrastructure spending, along with programs designed to support the housing market. Policymakers face the added challenge of stemming capital flight, which puts pressure on the yuan and forces the government to spend its reserves. Losing control of outflows and the yuan would put further pressure on both the Chinese and global economy. Europe, one of China’s leading trading partners, would be especially vulnerable.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA). Past performance is no guarantee of future results.
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-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY 10017