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Week Ended May 11, 2012

European concerns drag stocks lower

Stocks declined for the week, although perhaps not as much as many feared given the potentially destabilizing election results in several European countries over the previous weekend. For example, on Sunday, French voters replaced President Nicholas Sarkozy with Francois Hollande, the first Socialist elected to the position in 30 years and an outspoken critic of the austerity programs negotiated by Sarkozy and German Chancellor Angela Merkel. Nevertheless, the sharp selloff that many predicted failed to materialize, and the U.S. market followed European markets in ending Monday roughly flat or even modestly higher.

Greece back in the spotlight

By midweek, investors' attention returned to Greece, where the strong showing of far-right and far-left parties in recent elections threatened to undermine the political consensus to follow through with deeply unpopular austerity programs required as part of Greece's bailout package. As worries grew about the stability of the eurozone, the euro dipped below $1.30 for the first time since January. On Thursday, however, stocks recovered somewhat as signs surfaced that Greece might in fact be able to form a coalition government.

Reassuring U.S. economic data cushions market declines

Stronger U.S. economic data also helped stocks toward the end the week. Weekly jobless claims surprised many by declining slightly, and a survey of consumer sentiment indicated that Americans were feeling better about the job market—helping balance some recent signals that the labor market was weakening. A fourth-straight week of declines in gas prices may also be boosting consumer attitudes. T. Rowe Price economists note that the ability of the U.S. economy to continue growing in the face of concerns about Europe and China reflects, in part, increasing internal resilience imparted by domestic rebalancing—for example, the substantial correction in housing valuations relative to rents. Unfortunately, news of a $2 billion trading loss at JPMorgan Chase drained some of the investor enthusiasm as the week ended.

Nasdaq and small-cap indexes fare better

The technology-oriented Nasdaq fared better than the broad market averages, as did the smaller-cap indexes. The slow growth environment currently favors growth stocks, which tend to be less reliant on a strong economy to generate rising corporate earnings. Large-caps appear more favorably valued than small-caps.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	12820.60	-217.67	4.94%
S&P 500	1353.39	-15.71	7.62%
NASDAQ Composite	2933.82	-22.52	12.62%
S&P MidCap 400	962.85	-2.95	9.48%
Russell 2000	788.31	-4.11	6.42%

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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U.S. Bond Market

Week Ended May 11, 2012

Turmoil in Europe Continues to Roil Bond Markets

Political strife in Europe rocked global financial markets throughout the week. All eyes focused on two key elections on May 6. France commanded center stage with a polarizing runoff between French President Nicolas Sarkozy and his Socialist challenger Francois Hollande. Hollande stated explicitly during the campaign that Germany should not be dictating fiscal policy to France—or to the rest of Europe, for that matter. He presented, instead, a so-called "growth compact" of reduced cuts in government spending and a continuation of the social welfare programs that have proven unsustainable over the long haul. In Greece, a plethora of left- and right-wing parties challenged the establishment powers that have dominated Greek politics for decades. A measure of investors' confidence in Greece's ability to resolve the dilemma was the breathtaking 21% yield on Greek government bonds. It is hardly encouraging that Germany, the eurozone's strongest economy relatively speaking, is itself tottering on the brink of recession and is unable to keep playing the role of Europe's bank of final resort.

At the end of the day, the election results were somewhat disquieting for bond investors. Hollande bested Sarkozy in France, and an unwieldy assortment of anti-establishment forces prevailed in Greece. Hollande and German Chancellor Angela Merkel seem poised to embark on a bad political and economic marriage that is likely to worsen over time with their diametrically opposed views on how to resurrect the overall European economy. The main question is whether the two leaders can come to terms and guarantee the survival of a united eurozone in its present form or whether its eventual dissolution was all but inevitable. Investors were less than thrilled by the results and triggered widespread bond market volatility in the wake of the elections.

Flight to Safety of U.S. Treasuries and German Bunds

The eurozone woes returned risk aversion to the market. While riskier fixed income securities have outperformed so far this year, investors reversed course this week and redirected assets into safer areas of the market—U.S. Treasuries and German bonds, whose yields fell to record lows of about 1.5%. As a result, the yield spreads between U.S. Treasuries and riskier bonds widened to a level that could eventually be troublesome if the trend continues. (Bond yields rise and fall counter to their price moves.) High yield bonds managed to hold up reasonably well in the face of the decline, as investors were eager to put cash to work amid thin supply. Investment-grade corporate securities were fairly quiet, although their yield spreads versus Treasuries slightly expanded because of concerns about Europe. U.S. Treasuries initially benefited from the fallout, although by the end of the week the yields had settled back, with longer-term yields closing only slightly lower than their levels of a week earlier.

U.S. Treasury Yields¹
Maturity	May 11, 2012	May 4, 2012
2-Year	0.26%	0.25%
10-Year	1.84%	1.88%
30-Year	3.02%	3.07%

This table is for illustrative purposes only. Past performance cannot guarantee future results.

¹Source of data: Bloomberg.com, as of 4 p.m. ET Thursday, May 11, 2012.

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International Market

Week Ended May 4, 2012

International Stocks

Foreign stock markets closed lower for the week ending May 04, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -2.24%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-2.24%	6.77%
Europe ex-U.K.	-3.41%	5.36%
Denmark	1.68%	22.99%
France	-3.69%	3.48%
Germany	-4.46%	13.25%
Italy	-6.66%	-5.60%
Netherlands	-3.78%	1.45%
Spain	-4.66%	-17.09%
Sweden	-2.68%	9.63%
Switzerland	-1.97%	7.83%
United Kingdom	-2.48%	7.02%
Japan	-0.91%	6.01%
AC Far East ex-Japan	1.31%	14.06%
Hong Kong	1.85%	14.93%
Korea	0.61%	15.37%
Malaysia	1.52%	8.57%
Singapore	-0.05%	20.10%
Taiwan	2.71%	12.02%
Thailand	1.60%	24.58%
EM Latin America	-2.35%	7.70%
Brazil	-3.68%	2.97%
Mexico	-0.15%	14.21%
Argentina	-0.99%	-34.98%
EM (Emerging Markets)	-0.56%	11.41%
Hungary	-2.63%	19.98%
India	-3.36%	9.52%
Israel	0.51%	11.28%
Russia	-6.35%	8.00%
Turkey	-2.10%	22.42%

International Bond Markets

International bond markets in developed countries were higher this week, with the J.P. Morgan Global Government Bond Less U.S. Index gaining 0.26%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.26%	0.77%
Europe
Denmark	-0.50%	0.52%
France	-0.17%	3.45%
Germany	-0.44%	2.87%
Italy	0.11%	11.36%
Spain	-0.38%	0.54%
Sweden	-0.56%	0.71%
United Kingdom	0.25%	3.14%
Japan	0.77%	-2.81%
Emerging Markets	0.96%	6.70%
Argentina	-1.31%	-1.88%
Brazil	0.59%	4.16%
Bulgaria	0.25%	3.76%
Russia	0.93%	6.48%

International Currency Markets

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


Currency	Close (May 4, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	79.880	-0.71%	3.68%
Euro	1.3114¹	1.10%	-1.02%
British pound	1.6159¹	0.49%	-3.97%

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.