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Week Ended January 25, 2013

Positive earnings surprises drive stocks to multiyear highs

The major indexes rose for the fourth straight week, and the broad S&P 500 Index finished out a stretch of eight daily gains as investors welcomed generally positive earnings and economic data. The larger-cap indexes hit their highest levels in five years, while the smaller-cap indexes headed further into record territory. The technology-heavy Nasdaq trailed a bit as an important component, Apple, declined after reporting revenues that were below expectations.

Earnings generally surpassing reduced expectations

Stocks enjoyed modest gains throughout the four-day trading week (markets were closed on Monday for the Dr. Martin Luther King, Jr. holiday) as earnings reporting season continued and investors were generally satisfied with both earnings and revenue reports and outlooks. Reuters reported that 68% of S&P 500 companies that have reported quarterly results had topped analyst profit expectations, a slightly higher proportion than over the previous several quarters. Profit estimates have generally come down, however, due to slowing global growth and the waning impact of cost-saving efforts to boost margins.

Reduced fears over fiscal gridlock also buoyed sentiment. Early in the week, House Republican leaders indicated that they would extend the federal government's debt limit for four months, postponing any threat of a government shutdown. On Wednesday, the House voted to suspend the debt ceiling until May 19.

Economic data encouraging overall, but home sales disappoint

Global economic data continued to provide a tailwind for stock prices. Chinese manufacturing also showed signs of rebounding, suggesting a healthier global economy. In the U.S., weekly jobless claims dropped to a five-year low. The U.S. housing market offered mixed signals, however. While previous figures were revised higher, December home sales declined. While T. Rowe Price economists expect renewed gains in home sales in coming months, they note that the recovery in housing demand is likely to be sluggish and remain hampered by tight credit conditions.

European stocks higher as prospects brighten

European stocks climbed to their highest levels in nearly two years during the week, thanks in part to evidence that the Continent's banks are making progress in cleaning up their balance sheets. While eurozone economies remain sluggish, T. Rowe Price equity managers note that European stocks remain reasonably priced, even after 2012's good performance. They also note that European markets are broad and deep, offering a large opportunity set for investors to consider. Additionally, there are many European companies that increasingly derive a significant proportion of their earnings outside of the eurozone.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13895.98	246.28	6.04%
S&P 500	1502.96	16.99	5.38%
NASDAQ Composite	3149.71	15.00	4.31%
S&P MidCap 400	1095.07	21.54	7.31%
Russell 2000	903.22	11.01	6.34%

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 25, 2013

Treasuries weaken, investment-grade corporate and tax-free bonds remains strong

U.S. Treasury yields rose over a holiday-shortened week as encouraging corporate earnings, a decline in U.S. jobless claims, and positive global manufacturing surveys lifted risk sentiment. The investment-grade corporate bond market experienced a generally uneventful week. Blackout periods associated with the release of quarterly earnings curbed new issuance, but the deals that did come to market saw strong investor demand. Cash flows into tax-free municipal bond funds picked up after turning negative in December. Lower-quality municipal debt continues to outperform the high-grade market.

Demand continues for riskier assets

Reports on Friday that eurozone banks planned to repay a larger-than-expected amount of the emergency liquidity they received from the European Central Bank fueled demand for riskier assets. High yield and emerging markets bonds also benefited from investors' improved risk appetite. Favorable supply and demand trends, solid fundamentals, relatively attractive valuations, and a gradually improving U.S. economy continue to support these assets. Despite yields hovering near all-time lows, we believe that yield spreads versus high-quality securities could tighten in the near term as default expectations remain tame. On Wednesday, the U.S. House of Representatives voted to temporarily suspend the nation's debt ceiling, which also lifted investors' risk appetite.

Bond returns could moderate after stellar results in 2012

Bonds overall generated outstanding results last year as global central banks kept interest rates low, driving investors in search of greater returns into higher-risk assets. T. Rowe Price cautions that returns in 2013 could be more modest. While subdued global growth and central bank actions have suppressed interest rates, a stronger growth pace could alter this dynamic. If rates begin to rise, cash flows into fixed income could slow down or even reverse as investors reallocate their assets into other investments. The risks for fixed income investors have risen with yields at historically low levels. Yields could stay where they are a while longer, but once U.S. fiscal issues are resolved and the job market strengthens, interest rates could gradually trend upward, pushing bond prices lower.

U.S. Treasury Yields¹
Maturity	January 25, 2013	January 18, 2013
2-Year	0.27%	0.25%
10-Year	1.95%	1.84%
30-Year	3.13%	3.03%

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 25, 2013.

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Week Ended January 18, 2013

International Stocks

Foreign stock markets closed lower for the week ending January 18, 2013 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -0.06%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-0.06%	3.20%
Europe ex-U.K.	-0.02%	4.32%
Denmark	0.97%	7.52%
France	0.62%	3.63%
Germany	-0.47%	2.19%
Italy	-0.35%	8.14%
Netherlands	-0.13%	3.80%
Spain	-0.51%	7.88%
Sweden	-0.55%	2.24%
Switzerland	-0.09%	5.56%
United Kingdom	-1.07%	1.91%
Japan	0.52%	2.06%
AC Far East ex-Japan	0.46%	2.42%
Hong Kong	0.99%	4.65%
Korea	-0.95%	0.07%
Malaysia	0.10%	0.96%
Singapore	-0.73%	0.56%
Taiwan	-0.89%	0.76%
Thailand	2.45%	3.33%
EM Latin America	0.73%	3.68%
Brazil	0.61%	2.63%
Mexico	0.36%	5.63%
Argentina	3.72%	9.36%
EM (Emerging Markets)	0.72%	2.44%
Hungary	5.50%	9.82%
India	3.34%	4.52%
Israel	-1.94%	1.80%
Russia	2.17%	5.15%
Turkey	6.17%	10.44%

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 -0.59%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	-0.59%	-1.78%
Europe
Denmark	-0.01%	-1.02%
France	-0.11%	-0.17%
Germany	0.18%	-0.47%
Italy	-0.63%	2.89%
Spain	-1.09%	2.32%
Sweden	-0.90%	-1.96%
United Kingdom	-1.21%	-3.84%
Japan	-0.70%	-3.68%
Emerging Markets	0.39%	-0.60%
Argentina	2.23%	-6.11%
Brazil	0.26%	-0.96%
Bulgaria	0.16%	-0.03%
Russia	0.30%	-0.83%

International Currency Markets

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


Currency	Close (January 18, 2013)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	89.950	0.97%	3.87%
Euro	1.3292¹	0.40%	-0.82%
British pound	1.5863¹	1.62%	2.41%

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.