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Week Ended January 18, 2013

Stocks rise modestly as earnings reporting season begins

Stocks rose modestly during the week as the fourth-quarter earnings season began in earnest. Expectations for modest profit growth were largely fulfilled, but a larger factor driving the market higher appeared to be some surprisingly positive economic growth signals. The large-cap S&P 500 Index reached its highest level since December 2007. Some observers noted that the Dow Jones Transportation Index, which is often interpreted as a barometer of overall economic activity, established a new record on Thursday.

Earnings mixed but appear to meet reduced expectations

Earnings growth slowed throughout much of the past year, as topline revenues weakened along with the global economy and companies largely exhausted cost-cutting efforts begun a few years ago. As a result, expectations for profit growth were fairly subdued going into the fourth quarter. To date, earnings results have been mixed, with some prominent banking and industrial firms beating estimates while others lagged. The ongoing problems with the 787 Dreamliner weighed on Boeing, a Dow component, while concerns over increasing smartphone competition have dragged down Apple, the largest component in the S&P 500.

Housing surge boosts sentiment

Investors appeared pleasantly surprised by economic data, which indicated that the U.S. economy ended on a stronger note than many expected given the overhang of the "fiscal cliff" crisis. The S&P 500 hit a new five-year intraday high on Thursday, following news that housing starts had risen by over 12% in December, resulting in the most active home construction market since July 2008 on the eve of the financial crisis. T. Rowe Price economists note that unusually warm weather may have been partly responsible but may also reflect accumulating momentum in the sector as builders struggle to keep up with underlying demand. The number of workers filing for unemployment benefits also fell to its lowest level in five years.

Fiscal uncertainty restrains gains, but lower correlations bode well for stock picking

Worries that the federal government might go over its debt limit in several weeks may have kept a lid on gains. T. Rowe Price managers note that corporate executives continue to relate that they are limiting spending given the uncertain political environment and the unknown effect of higher payroll and income tax rates in 2013. Upcoming negotiations over across-the-board spending cuts and raising the U.S. debt ceiling are likely to create greater volatility in financial markets into the spring. We expect any budgetary and fiscal solution reached in the coming months will reduce U.S. economic activity in the short term, although we anticipate modest economic growth in 2013. On a brighter note, gauges of market correlation—which measure how much stocks rise and fall in unison—have lately subsided from record levels of previous years, indicating that investors may be beginning to shift their focus from macroeconomic events to company-specific factors. A return to more normalized correlation levels in the stock market could benefit investors who focus on company fundamentals like earnings, cash flow, and management.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13649.70	161.27	4.16%
S&P 500	1485.97	13.92	4.19%
NASDAQ Composite	3134.71	9.08	3.82%
S&P MidCap 400	1073.53	15.96	5.20%
Russell 2000	892.21	11.24	5.05%

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.

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Week Ended January 18, 2013

Volatile Treasuries little changed, while demand continues for investment-grade corporates

After sliding for five straight days, the 10-year Treasury yield surged on Thursday on news of better-than-expected housing and employment numbers and reports that House Republicans may ease their resistance to raising the U.S. debt ceiling. Renewed Treasury demand on Friday, however, erased much of Thursday's runup in yields, leaving them little changed for the week. Issuance picked up in the investment-grade corporate bond market, which was met with solid investor demand. In particular, several large financial institutions issued bonds after delivering their fourth-quarter earnings reports. Investor speculation around leveraged buyouts mounted after rumors circulated that a major technology company may be taken private.

High yield and municipal bonds both strong during the week

It was a relatively good week in the high yield market. Returns were positive through Thursday, and the broad high yield market mostly took its cues from U.S. equities. New issues continue to garner substantial demand, and most are trading up in the secondary market. Most new deals were oversubscribed, but issuers are finding opportunities to tighten pricing. While yields are near all-time lows in this asset class, high yield bonds continue to perform well due to strong technical and fundamental underpinnings. Tax-free bonds enjoyed a good week, with strong demand for new issues.

Outlook improves for Chinese and Spanish bonds but sours on Venezuelan debt

The main story in emerging markets debt was China's solid finish in the final quarter of 2012 with 7.9% annual economic growth, which was slightly ahead of expectations. Spain successfully sold nearly $6 billion worth of bonds on Thursday, and the country's 10-year yield hovered down around 5% despite continued troubles in its banking system—a reflection of increased investor confidence in Europe. On Tuesday, Moody's changed Venezuela's outlook to negative from stable because of increased political uncertainty and risks to the economy. Local buyers stepped in, however, to support the Venezuelan market.

Housing remains bright spot in U.S. economy

In the U.S., the housing market has emerged as the brightest spot on the economic horizon. While overall U.S. economic growth has been tepid and corporate earnings growth has slowed, home sales and prices have been rising—although they are still well below their pre-crash levels. The level of construction activity remains low, but it has been on a strong upward trajectory. Construction of new homes rose 12.1% in December over November's pace, thanks to warmer-than-usual weather. December's gains may reflect accumulating momentum in the housing construction recovery, based on the shortfall of new construction relative to underlying demand. The inventory of homes available for sale remains repressed while demand is rising, which could support the upward pressure on existing home prices.

U.S. Treasury Yields¹
Maturity	January 18, 2013	January 11, 2013
2-Year	0.25%	0.24%
10-Year	1.84%	1.87%
30-Year	3.03%	3.04%

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 18, 2013.

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Week Ended January 11, 2013

International Stocks

Foreign stock markets closed higher for the week ending January 11, 2013 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 1.41%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	1.41%	3.26%
Europe ex-U.K.	2.49%	4.34%
Denmark	4.01%	6.48%
France	1.62%	2.99%
Germany	1.61%	2.68%
Italy	5.33%	8.52%
Netherlands	2.52%	3.93%
Spain	5.74%	8.43%
Sweden	0.61%	2.81%
Switzerland	3.34%	5.66%
United Kingdom	1.09%	3.02%
Japan	-0.09%	1.53%
AC Far East ex-Japan	-0.26%	1.95%
Hong Kong	1.01%	3.62%
Korea	-0.22%	1.03%
Malaysia	0.28%	0.85%
Singapore	0.36%	1.30%
Taiwan	0.14%	1.67%
Thailand	-0.79%	0.86%
EM Latin America	-0.37%	2.93%
Brazil	-1.42%	2.01%
Mexico	1.54%	5.24%
Argentina	0.95%	5.43%
EM (Emerging Markets)	-0.44%	1.70%
Hungary	2.62%	4.10%
India	-0.25%	1.15%
Israel	4.58%	3.81%
Russia	1.79%	2.92%
Turkey	2.11%	4.02%

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 -2.11%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.71%	-1.20%
Europe
Denmark	1.99%	-1.00%
France	2.21%	-0.06%
Germany	2.03%	-0.64%
Italy	3.36%	3.55%
Spain	3.33%	3.45%
Sweden	0.65%	-1.07%
United Kingdom	1.05%	-2.66%
Japan	-1.06%	-3.00%
Emerging Markets	-1.15%	-0.98%
Argentina	-10.41%	-8.17%
Brazil	-0.34%	-1.22%
Bulgaria	0.03%	-0.19%
Russia	-0.89%	-1.13%

International Currency Markets

On the currency front, the U.S. dollar was weaker against the major currencies for the week.


Currency	Close (January 11, 2013)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	89.080	1.17%	2.94%
Euro	1.3346¹	-2.30%	-1.22%
British pound	1.6125¹	-0.55%	0.80%

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.