U.S. Stock Market

Week Ended September 14, 2012

Stocks surge, but economic concerns linger

Stocks recorded a second consecutive week of strong gains as investors celebrated central bank efforts to stimulate the jobs market and bolster the U.S. and European economies. The Dow climbed to within 5% of the all-time record it established in October 2007. The Nasdaq advanced beyond its 2007 highs, although it remains well below the all-time high established in March 2000. The S&P MidCap 400 and the small-cap Russell 2000 indexes set new records.

Fed moves spur markets

The market surged on Thursday afternoon, following the announcement by the Federal Reserve that it was starting a third round of quantitative easing in the form of an open-ended program to purchase $40 billion worth of mortgage-backed securities per month. Significantly, the Fed set no time limit on its buying program, but indicated that it would continue purchases as long as "the outlook for the labor market does not improve substantially." The Fed also extended its policy rate guidance by half a year, anticipating that "exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." T. Rowe Price economists note that the Fed's statement implied that it will maintain interest rates at low levels even after growth picks up, although it is likely to cease asset purchases at that point.

While most investors had expected some action to spur the economy, the Fed's decision was more forceful than many had expected. The Fed's purchases of mortgage-backed securities are designed to revive the housing market, which may boost overall economic growth and should help keep long-term interest rates across the economy at low levels. Most equity investors reacted enthusiastically to the prospects for faster growth, although some worry that the Fed has set the stage for future inflation, which can weigh on stock prices.

European central bank action also on track

A primary factor in last week's gains had been the announcement of a similarly aggressive monetary policy in Europe, where the European Central Bank announced plans to buy short-term debt from fiscally burdened member countries. Investors were reassured this week when a decision by the German Constitutional Court allowed Germany's participation in the program.

Earnings still healthy, but global economy remains fragile

This week's returns have added to the already strong gains in equity markets so far this year. Corporate earnings in the U.S. have held up reasonably well, but the question now is whether the domestic economy can gather momentum in the face of a recession in the eurozone and slowing growth in China. This week's central bank actions are encouraging, but they also highlight the fragile condition of the global economy. We remain hopeful that recent policy measures in the U.S. and abroad will provide a firmer foundation for global growth.

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.