U.S. Stock Market

Week Ended July 27, 2012

Stocks stage comeback on hopes for central bank stimulus

A strong rally on Thursday and Friday helped markets shake off sharp early losses and end with a good gain for the week. Global markets slumped Monday and Tuesday in response to the deepening European debt crisis. Spanish bond yields reached well above 7%, a level generally considered unsustainable. Adding to investor disappointment, Moody's downgraded its outlook for Germany and other more-stable European economies because of their exposure to the escalating problems of fellow eurozone members.

Earnings reflect Europe slowdown

Investors were also discouraged that U.S. corporate earnings appeared to be taking a more substantial hit from the slowdown in Europe and Asia. Carmakers reported a sharp slowdown in European sales, and global shipping giant UPS cut its earnings outlook for the year partly because of declining shipping volumes in Asia. Some prominent exporters reported better-than-expected earnings, however, helping provide a dose of optimism at midweek.

"Whatever it takes"

Paradoxically, the bleak economic picture helped foster a powerful rally on Thursday as investors began to anticipate that the Federal Reserve and other central banks would take further steps to spur growth. European Central Bank President Mario Draghi promised that the bank stood ready to do "whatever it takes" to keep the eurozone intact, which many interpreted as a signal that the ECB would resume buying European sovereign debt in order to push down yields. A similar statement of resolve from Germany's chancellor Angela Merkel on Friday helped markets extend their gains. In the U.S., speculation grew that the Fed would undertake another round of quantitative easing. The Commerce Department reported that growth in the U.S. economy had slowed in the second quarter, although not as much as many had anticipated. T. Rowe Price economists expect growth to improve modestly in the current quarter, thanks in part to a continued recovery in the housing sector.

Volatility often creates opportunity

While no one welcomes wild market swings, T. Rowe Price managers note that the market's obsession with short-term issues can result in opportunities—particularly where investors seem to be ignoring a firm's market position or long-term prospects. While economic and political turmoil have often weighed on profits and stock prices, well-managed companies seem to cope with macro challenges and eventually return to profitability.

U.S. Stocks1

Index2

Friday's Close

Week's Change

% Change
Year-to-Date

DJIA

13075.66

253.09

7.02%

S&P 500

1385.97

23.31

10.21%

NASDAQ Composite

2958.09

32.79

13.55%

S&P MidCap 400

948.81

8.27

7.89%

Russell 2000

795.99

3.46

7.46%

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 July 27, 2012

Eurozone events continue to roil fixed income markets

Longer-term Treasury yields fell to all-time lows early in the week, as concerns about Europe mounted, global economic data disappointed, and some blue chip companies' earnings fell short of expectations. However, by the end of the week yields climbed above their levels of the previous week following positive U.S. economic data and after European Central Bank President Mario Draghi said the central bank is "willing to do whatever it takes to preserve the euro." Spain, for example, is likely to request additional aid before year-end. Another major development was Moody's putting AAA rated Germany, Luxembourg, and the Netherlands on a negative outlook due to the increasing risk of supporting the peripheral countries and a deteriorating growth outlook for the European core. Local emerging markets sovereign debt did extremely well, with central banks cutting rates to stimulate growth. The high yield market posted modest declines in a volatile week in global equity markets. Investors are showing a preference for higher-quality, high yield bonds in the secondary market in light of the uncertain macro environment. Despite headlines about municipal defaults in California, municipal bonds performed well all week—as they have throughout the month. Munis are on pace for record-breaking monthly performance, with light issuance accompanied by strong demand.

Yields should remain low as global growth slows

The U.S. economy grew at an annualized rate of just 1.5% in the second quarter, off from 2.0% in the first. Growth below 2.0% a year is not considered strong enough to lower the unemployment rate, which currently stands at 8.2%. With worldwide economic growth in the doldrums, the global growth trajectory remains uncertain and continuing volatility seems likely. In the U.S., the growth rate has been muted by an ongoing correction in private sector imbalances and is threatened by government inaction on fiscal policy. At the same time, the eurozone economy appears to have contracted in the second quarter, as the core countries of Germany and France no longer seem immune to weakness elsewhere. In addition, the potential for weaker growth in key emerging markets, including China, Brazil, and India, could lead to renewed caution among investors. In this environment, T. Rowe Price expects Treasury yields to remain low over the near term.

U.S. Treasury Yields1

Maturity

July 27, 2012

July 20, 2012

2-Year

0.24%

0.21%

10-Year

1.53%

1.46%

30-Year

2.61%

2.54%

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, July 27, 2012.

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International Market

Week Ended July 20, 2012

*       International Stocks

*       International Bond Markets

*       International Currency Markets

International Stocks

Foreign stock markets closed higher for the week ending July 20, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 0.43%.

 

Region/Country

Week's Return

% Change Year-to-Date

EAFE

0.43%

2.38%

Europe ex-U.K.

-0.07%

0.00%

Denmark

1.82%

16.46%

France

-0.02%

-0.73%

Germany

0.53%

6.12%

Italy

-5.42%

-14.82%

Netherlands

1.38%

0.81%

Spain

-7.36%

-27.44%

Sweden

2.55%

8.13%

Switzerland

1.00%

3.54%

United Kingdom

0.33%

4.60%

Japan

-0.68%

-0.13%

AC Far East ex-Japan

1.94%

6.73%

Hong Kong

2.44%

11.26%

Korea

1.68%

3.68%

Malaysia

2.11%

8.05%

Singapore

2.02%

21.49%

Taiwan

1.82%

3.09%

Thailand

-1.11%

16.81%

EM Latin America

0.56%

0.51%

Brazil

0.33%

-7.52%

Mexico

1.26%

17.21%

Argentina

-0.83%

-47.00%

EM (Emerging Markets)

1.24%

4.41%

Hungary

1.92%

8.89%

India

-0.45%

8.42%

Israel

2.45%

-2.40%

Russia

1.94%

5.35%

Turkey

-0.86%

27.22%

 

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 0.42%.

 

Region/Country

Week's Return

% Change Year-to-Date

Developed Markets

0.42%

0.08%

Europe

 

 

Denmark

0.04%

-2.39%

France

0.49%

0.99%

Germany

-0.03%

-1.96%

Italy

-1.72%

0.09%

Spain

-4.10%

-13.48%

Sweden

1.84%

1.78%

United Kingdom

0.97%

4.35%

Japan

1.03%

-0.03%

Emerging Markets

0.88%

10.73%

Argentina

-1.99%

-4.50%

Brazil

0.90%

8.48%

Bulgaria

0.81%

5.26%

Russia

0.90%

10.17%

 

International Currency Markets

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

 

Currency

Close
(July 20, 2012)

Week's Return
(U.S. $)

% Change
Year-to-Date (U.S. $)

Japanese yen

78.565

-0.82%

2.07%

Euro

1.21681

0.62%

6.27%

British pound

1.56331

-0.55%

-0.59%

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


All charts are for illustrative purposes only and do not represent the performance of any specific security. Past performance cannot guarantee future results.