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Week Ended December 14, 2012

Stocks modestly lower for the week as fiscal cliff countdown continues

Stocks were modestly lower for the week as early optimism over a budget deal gave way to pessimism later in the week. The small-cap Russell 2000 Index managed a small gain.

No news on fiscal cliff is good news—at least for a while

Investors kept a close eye on budget negotiations in Washington as the clock ticked down on reaching an agreement before the fiscal cliff of automatic spending cuts and tax increases kicks in at the start of the new year. No news was generally considered to be good news early in the week, as a lack of public statements from both sides was interpreted as a sign of progress. Renewed political posturing later in the week appeared to sour sentiment, however, helping erase the market's earlier gains.

If Congress and the president do not agree to delay or lessen the tax increases and spending cuts that are scheduled to take place, T. Rowe Price's economists calculate that U.S. gross domestic product (GDP) will be considerably weaker in 2013 than it otherwise would have been. Opinions vary, however, as to whether this by itself would send the U.S. economy back into a recession. At present, T. Rowe Price's economists believe that a deal will be reached before the end of the year and that the odds of a U.S. recession next year are low.

"QE4" leaves investors unimpressed

Stocks rose early Wednesday, apparently driven in part by hopes that the Federal Reserve would announce further economic stimulus. The Fed did not disappoint, announcing that it would continue to purchase Treasury bonds and surprising most by setting a specific targets for the unemployment rate and inflation—6.5% and 2.5%, respectively—before it would curtail its stimulus measures. The gains evaporated late in the session, however, suggesting that investors are growing increasingly skeptical of the central bank's ability to guide the recovery.

European markets see gains, but T. Rowe Price analysts believe the region's economy has not reached bottom

Major developed markets outside the U.S. generally fared better. A rise in a German investor sentiment index boosted European shares early in the week. T. Rowe Price's London-based portfolio managers and analysts do not believe that the economic situation in Europe has reached a bottom. Nevertheless, they are encouraged by the tough medicine that several nations have imposed, which should eventually bring about stronger economies. They are also encouraged that the European Central Bank's aggressive actions to prevent countries from sliding into default have fostered stability in the bond markets.

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13135.01	-20.12	7.51%
S&P 500	1413.59	-4.48	12.40%
NASDAQ Composite	2971.33	-6.71	14.06%
S&P MidCap 400	1001.42	-1.06	13.87%
Russell 2000	823.11	0.95	11.12%

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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Week Ended December 14, 2012

High yield bonds stay strong, but other fixed income segments weaken

The high yield market continued to benefit from a strong technical backdrop as investors put cash to work before the typical year-end slowdown, boosting the sector's returns. High yield companies followed a similar trend, issuing new securities before the primary market standstill that usually occurs in late December. The opposite was the case for other areas of the market. Long-term U.S. Treasury prices fell and yields moved higher in response to the latest Federal Reserve stimulus programs (see below). The new monetary measures, along with higher inflation expectations, put pressure on longer-term Treasuries in particular. Investment-grade corporate bonds and municipal securities also traded down in tandem with rising Treasury yields. In addition, heightened issuance and weaker demand from bond dealers had a negative impact on tax-free bonds.

The Fed continues to prime the pump as the fiscal cliff looms larger on the horizon

The U.S. Federal Reserve announced that it will ramp up its stimulus programs because of disappointment with the pace of economic growth, particularly as it affects the labor market. The nation's central bank will keep short-term rates at their current low levels as long as unemployment remains above 6.5% and inflation is contained below 2.5%. The Fed will also step up its bond-buying activities, purchasing as much as $85 billion worth of mortgage-backed and Treasury securities each month until conditions improve. "The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Federal Open Market Committee stated during the week. Meanwhile, negotiations in Washington, D.C., among policymakers to resolve issues central to the impending fiscal cliff-a combination of substantial tax increases and spending cuts—were still stalled as we approached the final days of trading for the year. If Congress and the president fail to reach an agreement to lessen the impact of the tax and spending issues, T. Rowe Price economists calculate that U.S. gross domestic product growth will slow considerably in 2013.

U.S. Treasury Yields¹
Maturity	December 14, 2012	December 7, 2012
2-Year	0.23%	0.24%
10-Year	1.71%	1.63%
30-Year	2.87%	2.81%

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, December 14, 2012.

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Week Ended December 7, 2012

International Stocks

Foreign stock markets closed higher for the week ending December 07, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 0.81%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	0.81%	15.16%
Europe ex-U.K.	0.52%	19.32%
Denmark	0.93%	29.89%
France	0.75%	19.39%
Germany	0.77%	27.97%
Italy	-1.55%	7.83%
Netherlands	1.39%	19.61%
Spain	-1.61%	-1.53%
Sweden	1.16%	19.72%
Switzerland	0.64%	20.69%
United Kingdom	0.83%	13.90%
Japan	1.09%	4.02%
AC Far East ex-Japan	1.17%	19.70%
Hong Kong	0.03%	27.18%
Korea	2.13%	18.00%
Malaysia	-0.23%	9.57%
Singapore	1.25%	28.76%
Taiwan	0.77%	17.51%
Thailand	1.43%	29.00%
EM Latin America	2.26%	4.55%
Brazil	2.26%	-4.77%
Mexico	2.63%	27.22%
Argentina	3.18%	-45.34%
EM (Emerging Markets)	1.70%	15.01%
Hungary	-5.08%	20.27%
India	0.30%	26.37%
Israel	0.07%	2.48%
Russia	2.57%	10.52%
Turkey	4.13%	60.55%

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 -0.01%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	-0.01%	2.17%
Europe
Denmark	-0.14%	2.89%
France	-0.09%	8.93%
Germany	-0.06%	3.78%
Italy	-0.92%	19.66%
Spain	-1.00%	4.01%
Sweden	0.05%	4.84%
United Kingdom	-0.37%	5.93%
Japan	0.35%	-4.40%
Emerging Markets	0.42%	17.50%
Argentina	5.50%	2.05%
Brazil	0.00%	12.45%
Bulgaria	0.03%	9.11%
Russia	0.01%	15.65%

International Currency Markets

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


Currency	Close (December 7 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	82.370	-0.12%	6.59%
Euro	1.2928¹	0.60%	0.41%
British pound	1.6021¹	0.04%	-3.09%

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.