Week Ended January 4, 2013
Stocks surge on fiscal
cliff deal
Stocks surged this week as
investors celebrated an at least temporary end to the fiscal cliff saga that
had weighed on the market over the past few months. The large-cap S&P 500
Index gained over 4.5%, while the technology-oriented Nasdaq fared even better.
The small-cap Russell 2000 Index set a new record, breaching the highs it had
established last September.
Although the nation did
technically fall over the fiscal cliff on January 1, hopes grew on Monday, the
last day of 2012, that policymakers would come to an agreement before the
mandated steep spending cuts and tax increases took effect. Congress remained
in session as markets closed Tuesday, partly because lawmakers hoped to avoid
turmoil when trading resumed the following morning.
In the end, a 13th-hour
agreement was reached to raise taxes, while delaying decisions on spending cuts
for two months. Despite the remaining uncertainty on spending cuts, the major
indexes soared when the markets opened on Wednesday. The S&P 500 enjoyed
its largest gain in over a year, bringing it to its best close in
three months.
Global markets also in
celebratory mood for New Year
The rally was global in
scope, reflecting the central position of the U.S. economy in the world's
financial system. Hong Kong's Hang Seng index gained over 3%, due in part to
positive data on manufacturing activity in China. A gauge of manufacturing
activity in Europe was less encouraging, but T. Rowe Price's
London-based analysts note that financial stress remains subdued in the eurozone,
which should help support markets.
U.S. economic data boosts
sentiment
The week's domestic
economic data also boosted sentiment and suggested that the U.S. economy had
weathered December's uncertainty, which many worried would weigh on business
investment and consumer spending. Major retailers reported better-than-expected
sales in December, and manufacturing activity picked up. Employers also added
155,000 jobs in the month, roughly in line with expectations.
T. Rowe Price economists note that the job gains were broadly based,
and that weekly earnings rose by a healthy 0.7%. They expect job growth to
continue at a similar rate in coming months, which should bring down the
unemployment rate by half a percentage point in a year.
|
U.S.
Stocks1 |
|||
|
Index2 |
Friday's Close |
Week's Change |
% Change |
|
DJIA |
13435.21 |
497.25 |
2.53% |
|
S&P 500 |
1466.47 |
64.04 |
2.82% |
|
NASDAQ Composite |
3101.66 |
141.35 |
2.72% |
|
S&P MidCap 400 |
1055.73 |
51.66 |
3.46% |
|
Russell 2000 |
879.49 |
47.07 |
3.55% |
This chart
is for illustrative purposes only and does not represent the performance of any
specific security. Past performance cannot guarantee future results.
1Source of data Reuters, obtained through Yahoo! Finance Closing
data as of 4 p.m. ET.
2The Dow Jones Industrial Average and the Standard & Poor's 500
Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index,
and the Russell 2000 Index are unmanaged indexes representing various segments
by market capitalization of the U.S. equity markets. The Nasdaq Composite is an
unmanaged index representing the companies traded on the Nasdaq stock market
and the National Market System.
___________
Week Ended January 4, 2013
New year brings sell-off in
Treasuries and continuing strength in high yield bonds
Investors sold Treasury
bonds in the wake of Washington's last-minute tax deal to address some of the
nation's fiscal issues. Good employment data, along with the release of Federal
Open Market Committee minutes revealing a more hawkish tone, also fed the
flight from Treasuries. The ensuing rise in yields impaired total returns for
some other sectors, particularly higher-quality issues with longer durations.
The high yield market, however, like many other higher-risk asset classes,
rallied following the passage of the year-end tax plan. We expect new issuance
in this area to pick up next week as issuers continue to take advantage of
compelling borrowing rates. High yield bonds generated double-digit returns in
2012, but with most high yield bonds now trading above par value, we would
expect more modest returns in 2013.
Emerging markets debt
strong, while year-end tax deal could benefit tax-free bonds
Emerging markets debt also
performed well following the U.S. tax resolution, as investors felt comfortable
enough with assuming more risk. Most emerging markets bonds ended the week with
tighter yield spreads versus higher-quality issues. The municipal market traded
down in sympathy with Treasuries. While the market remains sluggish, the new
tax law delays any changes to the tax-exempt status of municipal securities,
which could result in higher demand earlier this year.
U.S. Congress detours
around the fiscal cliff
The U.S. Congress found a
detour around the year-end fiscal cliff of scheduled tax hikes and spending
cuts with an agreement to extend current tax rates for the overwhelming
majority of taxpayers. Only individuals earning more than $400,000 a year, and
couples earning more than $450,000, will see their rates rise in 2013—although
taxpayers at all income levels will be subject to a two-percentage-point
increase in the employee portion of the Social Security tax. It will rise to
6.2% from 4.2%, where it had been for several years as part of a fiscal
stimulus package.
The measures, amounting to
roughly 1.5% of U.S. gross domestic product, were in line with
T. Rowe Price expectations. The tax changes should help reduce the
uncertainty associated with the direction of tax policy going forward. However,
overall budget policy falls into the pattern of temporary, inconclusive
decision-making that continues to pose problems. The next battle will be
overspending, since the policy just adopted suspends the scheduled cuts of $110
billion in federal outlays for another two months. The upcoming debate is
likely to center on the precise composition of reductions in spending, which
will coincide with the need to raise the debt limit at the end
of February.
|
U.S.
Treasury Yields1 |
||
|
Maturity |
January 4, 2013 |
December 28, 2012 |
|
2-Year |
0.27% |
0.25% |
|
10-Year |
1.91% |
1.71% |
|
30-Year |
3.10% |
2.88% |
This table is for
illustrative purposes only. Past performance cannot guarantee future
results.
1Source of data: Bloomberg.com, as of 4
p.m. ET Friday, January 4, 2013.
___________
Week Ended December 28,
2012
International
Stocks
Foreign stock markets closed higher for the week ending December
28, 2012 with the broad international measure, the MSCI EAFE Index (Europe,
Australasia, and Far East), gaining 0.01%.
|
|
||
|
Region/Country |
Week's Return |
% Change Year-to-Date |
|
EAFE |
0.01% |
18.03% |
|
Europe ex-U.K. |
-0.43% |
22.58% |
|
Denmark |
0.33% |
32.27% |
|
France |
-0.73% |
22.50% |
|
Germany |
0.11% |
32.47% |
|
Italy |
-0.15% |
13.78% |
|
Netherlands |
-0.34% |
21.03% |
|
Spain |
-1.31% |
4.40% |
|
Sweden |
0.12% |
23.31% |
|
Switzerland |
-0.59% |
21.76% |
|
United Kingdom |
-0.38% |
15.12% |
|
Japan |
1.13% |
8.83% |
|
AC Far East
ex-Japan |
1.21% |
22.29% |
|
Hong Kong |
0.34% |
28.22% |
|
Korea |
1.38% |
21.48% |
|
Malaysia |
1.22% |
13.27% |
|
Singapore |
0.72% |
31.55% |
|
Taiwan |
2.37% |
17.66% |
|
Thailand |
0.88% |
34.94% |
|
EM Latin America |
0.34% |
8.98% |
|
Brazil |
0.60% |
0.49% |
|
Mexico |
-0.54% |
29.08% |
|
Argentina |
-0.19% |
-37.56% |
|
EM (Emerging
Markets) |
1.24% |
18.63% |
|
Hungary |
1.22% |
23.21% |
|
India |
1.51% |
25.96% |
|
Israel |
-2.84% |
-4.07% |
|
Russia |
1.02% |
14.76% |
|
Turkey |
3.04% |
65.53% |
International
Bond Markets
International bond markets in developed countries were lower
this week, with the J.P. Morgan Global Government Bond Less U.S. Index losing
-0.89%.
|
|
||
|
Region/Country |
Week's Return |
% Change Year-to-Date |
|
Developed Markets |
-0.89% |
1.07% |
|
Europe |
|
|
|
Denmark |
1.09% |
5.38% |
|
France |
0.35% |
11.59% |
|
Germany |
0.87% |
6.40% |
|
Italy |
0.14% |
23.49% |
|
Spain |
0.34% |
7.92% |
|
Sweden |
0.64% |
6.88% |
|
United Kingdom |
0.48% |
6.65% |
|
Japan |
-2.55% |
-9.05% |
|
Emerging Markets |
0.19% |
17.94% |
|
Argentina |
1.49% |
7.61% |
|
Brazil |
-0.01% |
12.44% |
|
Bulgaria |
0.12% |
9.20% |
|
Russia |
0.09% |
17.12% |
International
Currency Markets
On the currency front, the U.S. dollar was stronger against the
major currencies for the week.
|
|
|||
|
Currency |
Close |
Week's Return |
% Change |
|
Japanese yen |
86.095 |
2.29% |
10.63% |
|
Euro |
1.32211 |
-0.35% |
-1.84% |
|
British pound |
1.61551 |
0.17% |
-3.95% |
1U.S. dollars per national currency
unit.
Sources: Foreign stock markets and currency sections are from
Rimes Technologies, using MSCI data. International bond markets are from J.P.
Morgan.
Note: All returns are in U.S. dollars. All bond indices are J.P.
Morgan. All stock indices are Morgan Stanley Capital International (MSCI).
|
Equity
Indices |
|
|
EAFE: |
MSCI
Europe, Australasia, and Far East Index |
|
Europe
Ex-U.K.: |
MSCI
Europe ex-U.K. Index |
|
Far East
Ex-Japan: |
MSCI AC
Far East ex-Japan Index |
|
Latin
America: |
MSCI
Emerging Markets Latin America Index |
|
Emerging
Markets: |
MSCI
Emerging Markets Index |
|
Bond
Indices |
|
|
Developed
Markets: |
J.P.
Morgan Global Government Bond Less U.S. Index |
|
Emerging
Markets: |
J.P.
Morgan Emerging Markets Bond Index Plus |
All charts are for illustrative purposes only and do not represent the
performance of any specific security. Past performance cannot guarantee
future results.