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Week Ended December 21, 2012

No "plan B" for stocks?

The major indexes were flat to modestly higher for the week. Early gains following signs of progress in budget negotiations gave way once again to fears that the country would go off the "fiscal cliff" of sharp tax increases and spending cuts at the start of the new year. Small- and mid-cap indexes did a better job of holding on to their early gains and registered good performance.

Stocks got off to a solid start to the week, bringing the major averages to their highest levels in two months. Investors appeared to be encouraged by news that House Speaker Boehner and President Obama were getting closer to a deal that would raise substantial revenue and result in large cuts to government spending, including entitlement programs. Financial stocks were particularly strong, thanks in part to some prominent analyst upgrades.

T. Rowe Price economists believe fiscal cliff effects could be delayed

Markets pulled back late Wednesday, however, after House Speaker Boehner announced that no deal was at hand and that he would instead have the House vote a "plan B" of tax increases on income over $1 million, as well as a series of spending cuts. On Thursday evening, however, the House Speaker canceled the vote due to a lack of support. Markets tumbled Friday morning as it looked increasingly likely that the country would go off the fiscal cliff in a couple of weeks. While the economy would suffer a large blow eventually, T. Rowe Price economists believe that the effect of scheduled tax increases and spending cuts could be delayed if a deal is not reached before January 1. (Also see What the Fiscal Cliff Means for Your Taxes.)

Washington gridlock felt globally

The fiscal cliff debate appeared to have a global impact as well. For example, Japanese stocks rallied sharply early in the week following the electoral success of the Liberal Democratic Party, which is seen as more likely to push growth-oriented policies. The setback in negotiations in Washington helped drive a sharp pullback in Japan's Nikkei average on Friday, however, as investors punished stocks reliant on exports to the U.S. In recent reports to shareholders managers of T. Rowe Price's international funds cited the fiscal cliff as one of the serious threats to the global economy in 2013

U.S. Stocks¹
Index²	Friday's Close	Week's Change	% Change Year-to-Date
DJIA	13190.84	55.83	7.97%
S&P 500	1430.15	16.56	13.72%
NASDAQ Composite	3021.01	49.68	15.96%
S&P MidCap 400	1021.29	19.87	16.13%
Russell 2000	846.20	23.09	14.24%

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 21, 2012

Slow week for bonds before holidays

Treasury yields marked their highest levels in weeks before falling slightly near the end of the week in an atmosphere of stalled negotiations among policymakers to resolve the fiscal cliff issues facing the nation. Buyers began to emerge in the municipal market, which has performed poorly in recent weeks, as tax-free yields relative to Treasuries looked increasingly attractive and new supply ground to a halt. High yield deals met strong demand early in the week, but issuance and trading volumes diminished toward the end of the week as traders departed for the holidays. The investment-grade bond and emerging debt markets were relatively quiet, with little new issuance and declining secondary market activity.

Down to the wire on major U.S. fiscal problems

Negotiations in Washington, D.C., to resolve issues central to the approaching fiscal cliff (a combination of substantial tax increases and spending cuts) ended the week precisely where they were before the November elections—in gridlock. As stated in an earlier report, 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. Estimates of third-quarter economic growth were revised upward from an annualized rate of 2.7% to 3.1%, with some improvements in the housing and labor markets. Fourth-quarter growth, however, is on pace to come in considerably ower.

U.S. Treasury Yields¹
Maturity	December 21, 2012	December 14, 2012
2-Year	0.27%	0.23%
10-Year	1.76%	1.71%
30-Year	2.94%	2.87%

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 21, 2012.

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Week Ended December 14, 2012

International Stocks

Foreign stock markets closed higher for the week ending December 14, 2012 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), gaining 1.18%.


Region/Country	Week's Return	% Change Year-to-Date
EAFE	1.18%	16.51%
Europe ex-U.K.	1.87%	21.55%
Denmark	1.55%	30.90%
France	2.35%	22.19%
Germany	2.36%	30.99%
Italy	2.64%	10.68%
Netherlands	1.48%	21.39%
Spain	3.67%	2.07%
Sweden	-0.37%	19.27%
Switzerland	1.03%	21.94%
United Kingdom	0.77%	14.78%
Japan	0.15%	4.18%
AC Far East ex-Japan	1.87%	21.93%
Hong Kong	1.49%	29.08%
Korea	2.85%	21.37%
Malaysia	1.79%	11.54%
Singapore	1.64%	30.88%
Taiwan	0.69%	18.32%
Thailand	2.53%	32.27%
EM Latin America	2.17%	6.82%
Brazil	2.51%	-2.38%
Mexico	1.32%	28.90%
Argentina	14.48%	-37.43%
EM (Emerging Markets)	1.84%	17.13%
Hungary	2.44%	23.19%
India	-0.48%	25.76%
Israel	-1.39%	1.06%
Russia	1.96%	12.68%
Turkey	0.44%	61.25%

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 -0.17%.


Region/Country	Week's Return	% Change Year-to-Date
Developed Markets	-0.17%	1.99%
Europe
Denmark	0.91%	3.82%
France	1.56%	10.63%
Germany	1.17%	4.99%
Italy	1.65%	21.64%
Spain	2.06%	6.15%
Sweden	-0.55%	4.27%
United Kingdom	-0.10%	5.83%
Japan	-1.60%	-5.93%
Emerging Markets	0.18%	17.71%
Argentina	3.16%	5.27%
Brazil	0.02%	12.47%
Bulgaria	-0.08%	9.02%
Russia	0.29%	15.98%

International Currency Markets

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


Currency	Close (December 14, 2012)	Week's Return (U.S. $)	% Change Year-to-Date (U.S. $)
Japanese yen	83.500	1.35%	7.86%
Euro	1.3109¹	-1.40%	-0.98%
British pound	1.612¹	-0.62%	-3.73%

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.