U.S. Stock Market

Week Ended May 18, 2012

Europe drags market to four-month lows

U.S. stocks fell each day this week, dipping to their lowest levels in four months and suffering their biggest weekly drop this year. Increasing fears that the Greek bailout plan may fall apart and result in the country leaving the eurozone, along with disarray in the Spanish banking system, were the primary causes for investor concern. Greece's president announced that the country would have to hold new elections after talks to form a new coalition government failed. The left- and right-wing parties that are expected to gain more parliamentary seats in the new elections have indicated their intention to renounce austerity measures demanded by Germany and other stronger European countries—even as a poor showing for the ruling party in German regional elections also raised questions about the appetite for further austerity measures in so-called core Europe. While the probability of a Greek exit from the euro has increased, T. Rowe Price analysts note that there is still strong support for the common currency in the country, suggesting that any exit is likely to come later rather than sooner.

Mid- and small-caps lead retreat

Mid- and small-cap stocks declined the most. The Russell 2000 Index has declined more than 10% from its high in March, the typical definition of a market correction (versus a "bear market" decline of 20% or more).

Signs suggest U.S. economy remains on modest growth track

The week's economic signals from the U.S. may have cushioned stocks' decline somewhat. Weekly jobless claims remained at reasonably low levels, housing market data were generally encouraging, and industrial output in April rose to its strongest pace since last December. Some investors appeared concerned by a drop in mid-Atlantic manufacturing activity, however. In a bright sign for American consumers, oil prices skidded to below $93 on Thursday, extending a two-week decline of more than 10% as traders were concerned about faltering global growth and the impact of the euro crisis. Retail sales rose only slightly in April, but T. Rowe Price economists note that upward revisions for February and March mean they remain on track for a decent gain in the quarter.

Bank regulation debate intensifies but prominent IPO comes to market

As criticism mounted over J.P. Morgan Chase's $2 billion trading loss announced last week, financial stocks performed poorly. The controversy also appeared to give added impetus to the proposed Volcker Rule that would bar banks from making certain speculative investments not for the benefit of their customers. Despite the market turmoil, social networking giant Facebook successfully launched its (IPO) on Friday.

U.S. Stocks1

Index2

Friday's Close

Week's Change

% Change
Year-to-Date

DJIA

12369.38

-451.22

1.24%

S&P 500

1295.22

-58.17

2.99%

NASDAQ Composite

2778.79

-155.03

6.67%

S&P MidCap 400

904.87

-57.98

2.89%

Russell 2000

746.43

-41.88

0.77%

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 18, 2012

Flight to U.S. Treasuries and German Bunds Continues Through the Week

Ongoing problems in the eurozone combined with economic worries in the U.S. drove fixed income investors out of riskier assets into relatively safe alternatives throughout the week. However, while T. Rowe Price analysts acknowledge that the probability of a Greek exit from the eurozone has risen since the recent election, we do not believe it would occur this year. The longer this process gets drawn out, the less impact it is likely to have on global markets because it would be priced in over time. Both U.S. Treasuries and German bunds received a boost amid the uncertainty, with bund yields hitting record lows. (Prices and yields move counter to each other.) By contrast, Spanish yields surged, ending around 6.3%. The yield on the 10-year U.S. Treasury bond slipped to its lowest level since September 2011, another period of elevated global turmoil. High yield bonds fell in value as investors reduced their risk, but the selling has so far been orderly. Another fixed income area that suffered during the week was investment-grade corporate bonds, particularly the banking sector, largely a result of the mounting trading losses at JPMorgan Chase.

Fed Warns of "Fiscal Cliff" That Threatens U.S. Economy

At its last meeting in April, Federal Reserve officials warned about looming tax increases and mandated spending cuts that could push the U.S. economy over a "fiscal cliff" of the government's own making. "Participants expected that the government sector would be a drag on economic growth over coming quarters," according to the minutes from the meeting. "They generally saw the U.S. fiscal situation also as a risk to the economic outlook; if agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013." Inaction could lead to further disarray in the markets. The Bush-era tax cuts are set to expire at the end of this year, and forced spending cuts authorized by the Budget Control Act of 2011 will amount to an estimated $1.12 trillion. Legislative provisions that extended unemployment benefits, limited the impact of the alternative minimum tax, and prevented cuts to Medicare doctors' salaries are also expected to vanish. The cumulative result could be a fiscal tightening equivalent to as much as 3.2% of gross domestic product next year. The Fed indicated that it stands ready to provide additional monetary stimulus to spur consumer spending if the economy flags further during the coming months. In addition, T. Rowe Price analysts believe that a temporary post-election deal to resolve the most serious of these issues is likely, regardless of the outcome in November.

U.S. Treasury Yields1

Maturity

May 18, 2012

May 11, 2012

2-Year

0.29%

0.26%

10-Year

1.71%

1.84%

30-Year

2.79%

3.02%

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 18, 2012.

 

 

 

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International Market

Week Ended May 11, 2012

International Stocks

Foreign stock markets closed lower for the week ending May 11, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -2.37%.

 

Region/Country

Week's Return

% Change Year-to-Date

EAFE

-2.37%

4.24%

Europe ex-U.K.

-1.32%

3.98%

Denmark

-3.55%

18.63%

France

-1.35%

2.09%

Germany

-1.12%

11.98%

Italy

-0.19%

-5.78%

Netherlands

1.45%

2.93%

Spain

0.77%

-16.45%

Sweden

-1.85%

7.59%

Switzerland

-2.75%

4.86%

United Kingdom

-1.46%

5.46%

Japan

-4.21%

1.55%

AC Far East ex-Japan

-4.85%

8.53%

Hong Kong

-5.37%

8.76%

Korea

-5.06%

9.54%

Malaysia

-1.59%

6.84%

Singapore

-3.38%

16.03%

Taiwan

-4.37%

7.12%

Thailand

-4.36%

19.14%

EM Latin America

-3.40%

4.04%

Brazil

-3.31%

-0.44%

Mexico

-4.16%

9.45%

Argentina

0.88%

-34.41%

EM (Emerging Markets)

-4.11%

6.83%

Hungary

-4.90%

14.10%

India

-3.38%

5.82%

Israel

-6.28%

4.29%

Russia

-1.72%

6.14%

Turkey

-2.11%

19.83%

 

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 -0.33%.

 

Region/Country

Week's Return

% Change Year-to-Date

Developed Markets

-0.33%

0.44%

Europe

 

 

Denmark

0.14%

0.66%

France

-1.00%

2.41%

Germany

-0.78%

2.06%

Italy

-1.29%

9.92%

Spain

-2.63%

-2.10%

Sweden

-0.98%

-0.27%

United Kingdom

-0.10%

3.04%

Japan

0.23%

-2.59%

Emerging Markets

-1.17%

5.46%

Argentina

-2.56%

-4.40%

Brazil

-0.69%

3.44%

Bulgaria

0.03%

3.79%

Russia

-0.77%

5.66%

 

International Currency Markets

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

 

Currency

Close
(May 11, 2012)

Week's Return
(U.S. $)

% Change
Year-to-Date (U.S. $)

Japanese yen

79.880

0.00%

3.68%

Euro

1.29441

1.30%

0.29%

British pound

1.60971

0.38%

-3.58%

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.