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Week Ended June 8, 2012

Stocks rise amid positive signals from Europe

Stocks recorded their best weekly gain since December as hopes grew that Spain would avoid following Greece and other nations into a full-blown debt crisis. On Wednesday, the S&P 500 recorded its biggest daily gain of the year, partly in response to reports that European authorities were considering lending money to Spain to back up its banks, which have suffered massive losses following the steep collapse in the country's housing market. Investors also grew more hopeful that the European Central Bank would cut short-term interest rates, which remain higher than those in the U.S. despite the continent's much more severe economic problems.

Hopes for Fed action support rally before fading

Another factor driving the midweek rally was hope that the Federal Reserve would take further action to spur the U.S. economy given the recent pullback in job growth. On Thursday, however, Fed Chairman Ben Bernanke appeared to cut the rally short when he testified before Congress and offered no signs of further monetary easing. Rather, Bernanke noted that recent labor market weakness was due in large part to seasonal factors—a perspective shared by T. Rowe Price economists.

U.S. economic recovery continues

The week's U.S. economic data proved somewhat more reassuring than it had been recently. The Fed's Beige Book survey of economic activity, released Wednesday, indicated that the recovery remained on track in many parts of the country. Weekly jobless claims stabilized somewhat, and the Institute for Supply Management's index of service sector activity surprised many by increasing in May.

Profit margins may ease, but valuations remain attractive

Less favorably, the Commerce Department reported on Wednesday that productivity growth had declined sharply in the first quarter following a period of rapid gains. T. Rowe Price analysts note that corporate profit margins show signs of easing from historically high levels as companies increase employment and investment to meet rising demand against a backdrop of diminishing productivity gains. Although we anticipate a deceleration in earnings growth, equity valuations are attractive relative to historical levels based on several measures, including price-to-earnings and price-to-free cash flow. Stocks offer dividend yields that, in many cases, are competitive with bond yields.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	12554.20	435.63	2.76%
S&P 500	1325.66	47.62	5.41%
NASDAQ Composite	2858.42	110.94	9.72%
S&P MidCap 400	925.60	28.61	5.25%
Russell 2000	768.60	30.39	3.76%

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 June 8, 2012

Fixed income markets change directions, benefiting high yield bonds.

After a period of record inflows into U.S. Treasuries, investors reversed course and poured money into riskier assets, including high yield bonds. Investors looking for higher yields have recently been building their cash reserves, waiting for the right opportunity to make a move as the yield spreads between high yield bonds and safer assets rose to the widest levels in a year. Within the investment-grade corporate bond market, the banking sector advanced on unfounded rumors that Moody's anticipated rating downgrade of a major financial institution may be less harsh than previously expected. Emerging markets bonds also performed well during the week, following excessive selling a week earlier. The yields on U.S. Treasuries increased when investors sold the securities and redeployed their assets into riskier asset classes, hopeful that the eurozone might finally be able to recapitalize the troubled banks in the region. An auction of Spanish bonds was largely successful, as investors accepted lower yields than they had been demanding earlier.

Moderate U.S. economic growth and continuing low inflation through year-end.

Federal Reserve Chairman Ben Bernanke told Congress on Thursday that he still anticipated moderate U.S. economic growth despite the poor jobs report the week before. "The Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and the economy in the event that financial stresses escalate," said Bernanke. The situation in the eurozone loomed as a potential threat to global stability, and Bernanke made it clear that the Fed could do only so much if the events in Europe unraveled out of control. In his testimony, the Fed Chairman reiterated that the U.S. needed to get its own fiscal house in order by the end of the year to avoid the consequences of expiring tax cuts and automatic spending reductions.

U.S. Treasury Yields¹
Maturity	June 8, 2012	June 1, 2012
2-Year	0.27%	0.25%
10-Year	1.63%	1.46%
30-Year	2.75%	2.52%

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, June 8, 2012.

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International Market

Week Ended June 1, 2012

International Stocks

Foreign stock markets closed lower for the week ending June 01, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -2.72%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	-2.72%	-4.91%
Europe ex-U.K.	-4.54%	-7.25%
Denmark	-6.96%	4.41%
France	-4.14%	-7.82%
Germany	-5.54%	-1.55%
Italy	-4.24%	-16.93%
Netherlands	-4.30%	-8.66%
Spain	-7.84%	-29.45%
Sweden	-4.08%	-4.77%
Switzerland	-2.72%	-3.07%
United Kingdom	-3.47%	-4.91%
Japan	0.04%	-2.88%
AC Far East ex-Japan	-0.01%	1.91%
Hong Kong	-0.45%	3.05%
Korea	1.36%	2.16%
Malaysia	0.24%	1.92%
Singapore	-1.98%	6.30%
Taiwan	-0.72%	0.63%
Thailand	-3.02%	7.19%
EM Latin America	-2.12%	-6.15%
Brazil	-1.94%	-10.57%
Mexico	-3.70%	-1.44%
Argentina	-7.35%	-45.31%
EM (Emerging Markets)	-0.79%	-1.16%
Hungary	-3.04%	-2.50%
India	-2.29%	-0.22%
Israel	1.10%	-3.18%
Russia	-2.84%	-7.73%
Turkey	1.38%	10.38%

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 0.99%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.99%	0.26%
Europe
Denmark	1.45%	0.34%
France	0.33%	1.33%
Germany	0.31%	0.04%
Italy	-2.28%	2.51%
Spain	-2.41%	-9.20%
Sweden	0.17%	-2.76%
United Kingdom	0.10%	2.22%
Japan	2.38%	-0.04%
Emerging Markets	-0.12%	2.96%
Argentina	-3.20%	-15.23%
Brazil	0.71%	2.87%
Bulgaria	-0.31%	3.08%
Russia	-0.82%	3.47%

International Currency Markets

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


Currency	Close (June 1, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.120	-1.89%	1.51%
Euro	1.2363¹	1.19%	4.76%
British pound	1.5336¹	1.92%	1.32%

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.