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Week Ended August 17, 2012

Stocks continue advance thanks to growing hopes for Europe

Stocks recorded modest gains for the week, due mainly to a rally on Thursday that lifted the large-cap indexes back near their postcrisis highs established in May. Investor sentiment appeared to improve following comments from Germany's Chancellor Angela Merkel, who stated that she was ready "to do everything we can" to support the euro. The comments echoed the promise to do "whatever it takes" made two weeks ago by European Central Bank (ECB) President Mario Draghi. The ECB and Germany have been viewed by many as the two major stumbling blocks to more forceful action to stem the Continent's credit crisis, so signs of resolve from the two leaders were particularly welcome.

Technology leads market's advance

The heavily technology-weighted Nasdaq index scored more robust gains for the week, due in part to strong earnings reports. Networking equipment giant Cisco drove a good gain in the index on Thursday after beating estimates for both revenues and profits while increasing its dividend. Investors have worried that a slowdown in global markets would weigh on technology exports by U.S. firms. The smaller-cap indexes also outpaced the S&P and Dow for the week.

Economic data provide fuel for both bulls and bears

Investors were disappointed by the growth rate in Japan in the second quarter, which came in well below estimates. The data provided further evidence of a slowdown in Asia, which has been the world's primary growth engine over the past few years. Expectations for growth in Europe were much lower, but the region's data surprised a bit on the upside. Growth in Germany and France has largely stalled, but the dominant economies in the eurozone appear to have avoided a meaningful downturn, at least in the short term.

Consumer steps up as manufacturing momentum fades

U.S. economic data were mixed as well. U.S. regional manufacturing indexes missed expectations, and weekly jobless claims rose modestly. The outlook was better on the consumer front, however, as a gauge of consumer confidence rose solidly and retail sales beat estimates for July. T. Rowe Price economists note that the gain in core retail sales—excluding autos, building materials, and gasoline—rebounded decisively, which could help lift economic output in the current quarter.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13275.20	67.25	8.66%
S&P 500	1418.16	12.29	12.77%
NASDAQ Composite	3076.59	55.73	18.10%
S&P MidCap 400	977.45	15.79	11.14%
Russell 2000	819.05	17.77	10.57%

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 August 17, 2012

High-quality bonds weaken; demand for high yield securities remains strong

Investment-grade corporate bond yields rose a bit during the week, more or less in tandem with U.S. Treasury yields. The yield spread between the two asset classes remained near its low point for the year, driven by relatively strong investor demand for corporates. The yield on the 10-year Treasury note climbed to its highest level since May. Municipal rates also moved higher as investor demand slackened slightly. Trading in emerging markets debt was quiet, which is typical for the normal August slowdown in emerging bond markets. The high yield new issues market was surprisingly active, since issuance is usually slow in August with many investment professionals on vacation. High yield issuers, however, continued to take advantage of ongoing strong demand by investors seeking higher yields, even at relatively low current interest rates.

U.S economic data are positive…

Reports on the U.S. economy were encouraging during the week. Retail sales increased and single-family housing starts were up 21.5% during the 12 months ended July 31, 2012. U.S. industrial production expanded 0.6% in July, suggesting underlying resilience in an economy still struggling to sustain momentum. In addition, consumer inflation is all but nonexistent. Consumer prices were flat in July for the second straight month, and the year-over-year increase was the smallest since November 2010 at 1.4%. The data led to speculation that additional Federal Reserve bond purchases are unlikely in the near term.

…as Europe contracts

The economic news emanating from Europe, however, was less sanguine. The eurozone's $13 trillion economy is officially shrinking, threatening to exacerbate a global slowdown that could eventually spill over onto U.S. shores. Overall economic activity in the 17-country bloc fell at an annualized rate of 0.7% in the second quarter. The peripheral countries of Greece and Spain—and even Italy with its much larger economy—are experiencing severe recessions, while Germany's economic growth has slipped to an annualized rate of only 1.1%, scarcely strong enough to sustain the rest of the union.

U.S. Treasury Yields¹
Maturity	August 17, 2012	August 10, 2012
2-Year	0.29%	0.26%
10-Year	1.81%	1.65%
30-Year	2.93%	2.74%

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, August 17, 2012.

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International Market

Week Ended August 10, 2012

International Stocks

Foreign stock markets closed higher for the week ending August 10, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 1.95%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	1.95%	7.30%
Europe ex-U.K.	1.30%	7.04%
Denmark	0.31%	22.00%
France	1.43%	7.38%
Germany	0.95%	12.32%
Italy	2.63%	-4.41%
Netherlands	0.57%	6.98%
Spain	4.31%	-16.45%
Sweden	1.44%	16.92%
Switzerland	0.22%	8.04%
United Kingdom	1.97%	9.11%
Japan	3.74%	2.27%
AC Far East ex-Japan	3.14%	11.25%
Hong Kong	1.72%	12.99%
Korea	6.23%	12.86%
Malaysia	0.84%	8.96%
Singapore	0.07%	24.13%
Taiwan	4.17%	8.43%
Thailand	2.71%	19.55%
EM Latin America	2.26%	4.78%
Brazil	3.72%	-0.56%
Mexico	-0.15%	18.35%
Argentina	8.28%	-44.24%
EM (Emerging Markets)	2.86%	9.34%
Hungary	1.39%	18.14%
India	2.89%	10.83%
Israel	0.10%	-3.74%
Russia	1.82%	8.34%
Turkey	-0.59%	36.41%

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 0.25%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	0.25%	0.88%
Europe
Denmark	0.16%	-2.50%
France	0.04%	2.28%
Germany	0.05%	-1.82%
Italy	0.58%	3.84%
Spain	-0.40%	-9.37%
Sweden	1.14%	4.83%
United Kingdom	1.05%	4.75%
Japan	0.16%	0.09%
Emerging Markets	-0.43%	11.90%
Argentina	-1.15%	-0.97%
Brazil	-0.21%	9.78%
Bulgaria	0.58%	6.38%
Russia	-0.76%	10.96%

International Currency Markets

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


Currency	Close (August 10, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	78.190	-0.52%	1.60%
Euro	1.2314¹	0.21%	5.14%
British pound	1.5691¹	-0.59%	-0.97%

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.