Week Ended April
5, 2013
Stocks fall on
economic worries
The major indexes
retreated from the record highs they established the previous week as a series
of poor economic signals suggested another springtime slowdown in the recovery
might be on the way. Companies will begin reporting first-quarter earnings next
week, but a lack of corporate news in the meantime left investors focusing on
the economy.
Weakening labor
market proves chief concern
The primary driver
of economic woes was the labor market. On Wednesday, stocks plunged sharply
following a report on job growth from payroll processing firm ADP that fell
short of expectations. Concerns were augmented a bit by Thursday's weekly
unemployment claims report, which showed its third consecutive rise. The
deciding blow came on Friday, however, when the Labor Department reported a
gain of only 88,000 jobs in March, the lowest since last June. The unemployment
rate fell slightly to a new four-year low of 7.6%, but that was mainly due to
workers leaving the labor force.
T. Rowe Price
economists see short-term payback
T. Rowe Price
economists did not anticipate the extent of the drop in payroll gains, but they
were not surprised to see a short-term payback for outsized gains in recent
months. Over the past year, payrolls have grown at an average pace of 170,000
per month, suggesting that February's increase of 268,000 (revised upward in
the latest report) was unsustainable. They also note that the report indicated
a longer average workweek resulting in a 0.4% rise in aggregate wage income.
Unfortunately, the
job market was not the only cloud on the horizon. Stocks moved lower to start the
week following news that factory activity had grown more slowly in March, while
a related indicator released on Wednesday pointed to a similar slowdown in the
services sector. While markets have largely taken the recent sequestration cuts
to federal spending in stride, the data added to worries that the economy might
be slowing as government contractors cut back on orders and furloughed workers
reduce spending.
Easy money likely
to continue supporting stock prices alongside other factors
Should it continue,
a slowdown in employment gains and economic growth might encourage the Federal
Reserve to keep its asset purchase program in place longer than expected; the
Fed has already committed itself to keep short-term interest near 0% as long as
the unemployment rate remains above 6.5% and inflation appears likely to stay
below 2.5%. While focused on company fundamentals, T. Rowe Price
managers note that the Fed's aggressive policy has been one factor boosting
markets in recent months. More significantly, corporate balance sheets are in
outstanding condition, and recent tax hikes on capital gains and dividend
income were not as significant as some had anticipated. We believe that stock
valuations are still reasonable relative to fixed income and cash alternatives.
U.S. Stocks1 |
|||
Index2 |
Friday's Close |
Week's Change |
% Change |
DJIA |
14565.02 |
-13.52 |
11.15% |
S&P
500 |
1553.27 |
-15.92 |
8.91% |
NASDAQ
Composite |
3203.86 |
-63.66 |
6.11% |
S&P
MidCap 400 |
1124.08 |
-30.58 |
10.16% |
Russell
2000 |
922.94 |
-30.29 |
8.66% |
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 April
5, 2013 U.S. bonds rally
across the board Treasury yields
plunged to their lowest levels of the year as labor market data came in weaker
than expected and other economic news disappointed investors (see below). The
decline in rates lifted returns for other investment-grade sectors,
particularly longer-term bonds. Investment-grade corporates performed well as
the search for income continues against the backdrop of low Treasury yields.
The same was true for high yield bonds, which maintained a positive tone during
the week. The new issues market was active, and many deals continue to be well
oversubscribed. Even though below investment-grade yields are hovering at
historically low levels and valuations are stretched, the yields remain appealing.
The municipal market started the week relatively unchanged but picked up steam
as the week ended, buoyed by the rally in Treasuries. Tax-exempt investors seem
to be returning to the asset class in the face of low new issuance. Emerging markets
bonds stable, reflecting developments in Argentina Emerging markets
debt experienced a quiet week as global investors eased their way into the
market after the extended holiday weekend. The notable exception was Thursday,
when investors moved heavily into the sovereign bond market. Argentina
announced it would use $2.33 billion of reserves to repay loans in order to
ease uncertainties about the country's ability to meet its debt obligations. U.S. economic
reports disappoint Payroll employment
grew by a disappointing 88,000 jobs in March, the slowest pace in nine months
and well short of expectations. At the same time, the nation's unemployment
rate fell from 7.7% to 7.6%, a result of more Americans dropping out of the
labor market. Analysts attributed the news to weakening economic growth as
higher taxes and government spending cuts started to have an impact, according
to The Wall Street Journal. Other reports during the week pointed to a
deceleration in manufacturing and service sector activity in March. T. Rowe Price
economists do not believe that the news will prompt a sea change in the Federal
Reserve's monetary policy, but it could delay a rollback in its monthly bond
purchases. In our view, we could be embarking on a three- to six-month period
of softer payroll growth following stronger growth in previous months. U.S. Treasury Yields1 Maturity April 5, 2013 March 28, 2013 2-Year 0.23% 0.24% 10-Year 1.71% 1.85% 30-Year 2.88% 3.10% 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, April 5, 2013. ___________ Week Ended March
29, 2013 International
Stocks Foreign stock markets closed lower for the week ending March 29,
2013 with the broad international measure, the MSCI EAFE Index (Europe,
Australasia, and Far East), losing -0.54%. Region/Country Week's Return % Change Year-to-Date EAFE -0.54% 5.23% Europe ex-U.K. -1.87% 3.01% Denmark -1.27% 4.36% France -2.21% 0.61% Germany -2.49% 0.27% Italy -5.80% -9.77% Netherlands -1.51% 2.43% Spain -6.60% -5.35% Sweden 0.45% 9.80% Switzerland 0.26% 11.67% United Kingdom -0.05% 2.49% Japan 0.97% 11.70% AC Far East ex-Japan 2.16% -0.21% Hong
Kong 1.47% 3.49% Korea 3.75% -3.21% Malaysia 3.27% -0.89% Singapore 2.24% 3.02% Taiwan 1.59% -0.21% Thailand 5.06% 10.12% EM Latin America 2.19% 0.92% Brazil 1.96% -0.77% Mexico 3.80% 6.08% Argentina -5.38% 2.72% EM (Emerging Markets) 1.93% -1.57% Hungary -1.64% -6.64% India 0.90% -2.55% Israel -1.12% 7.11% Russia -0.60% -3.17% Turkey 4.71% 8.16% 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
-0.17%. Region/Country Week's Return % Change Year-to-Date Developed Markets -0.17 -4.18 Europe Denmark -0.64 -2.98 France -1.26 -2.82 8Germany -0.78 -2.29 Italy -2.06 -2.57 Spain -2.06 0.10 Sweden 0.15 -0.81 United
Kingdom 0.28 -5.92 Japan 0.82 -5.72 Emerging Markets 0.02 -3.30 Argentina -4.83 -17.91 Brazil 0.80 -4.32 Bulgaria -0.05 0.29 Russia -0.18 -3.07 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 94.020 -0.50% 8.04% Euro 1.28411 1.20% 2.60% British
pound 1.51851 0.36% 6.59% 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
(March 29, 2013)
(U.S. $)
Year-to-Date (U.S. $)
All charts are for illustrative purposes only and do not represent the
performance of any specific security. Past performance cannot guarantee
future results.