David Brown, Senior Managing Director and Head Portfolio Manager, TIAA General Account
While no one would suggest the U.S. economy is close to firing on all cylinders, there’s continuing evidence that the stalled engine is at least starting to rumble back to life. The past week brought more positive economic news, particularly with regarding to housing and employment—and financial markets took notice.
The National Association of Home Builders/Wells Fargo Housing Market Index, a key gauge of homebuilder confidence, notched its fourth consecutive monthly increase in January, reaching its highest level since June 2007. The trajectory for housing has significant implications for unemployment, as homebuilding is a labor-intensive process. While the NAHB/Wells Fargo index remains low by historical standards, its continued improvement augurs well, since a stabilizing housing market should translate into very positive sentiment for banks, homebuilders and durable goods producers. Tempering this optimism was a 4.1% decline in housing starts in December. For 2011 as a whole, housing starts were 3.4% higher than in 2010.
On the employment front, weekly first-time jobless claims dropped by 50,000, to 352,000—their lowest level since April 2008. The large drop was a welcome reversal of the previous week’s unexpectedly sharp increase, although seasonal quirks at the beginning of each year typically make it difficult to assess the true direction of unemployment claims until later in January.
Meanwhile, market volatility related to Europe’s ongoing sovereign debt crisis abated somewhat, despite the recent credit rating downgrades of nine eurozone countries, including France, Austria, Spain, Italy and Portugal—and a subsequent downgrade of the European Financial Stability Facility, the bailout fund created to help address the crisis. Because the downgrades were long expected, markets tended to shrug them off once they materialized. Both France and Spain, for example, conducted successful bond auctions after being downgraded by Standard & Poor’s the week before. As borrowing costs for financially strapped nations fell, providing better liquidity, shares of European banks rallied. However, longer-term structural and fiscal policy issues in the region still need to be addressed.
Another positive development came at midweek, when the International Monetary Fund announced that it would seek to boost its lending capacity by $500 billion, which will greatly expand the fund’s capacity to assist European countries that cannot refinance their debts. The announcement added to positive bond market sentiment, particularly in corporate bonds, commercial mortgage-backed securities and high-yield securities, which have benefited from renewed investor confidence and an increased appetite for risk in the early weeks of 2012.
The generally upbeat environment helped push the S&P 500 Index above 1,300 by midweek, its highest level since last July. The S&P 500 has returned over 4% since the beginning of the year. Based on MSCI indexes, developed international equity markets, including those in Europe, are up roughly 2% in U.S. dollar terms year-to-date, while emerging markets are up over 7%.
Potential headwinds remain, however. The recent bounce in the markets has been led by beaten-down sectors such as banks and homebuilders, but a sustainable market advance may hinge on broader earnings results, which so far have been underwhelming this reporting season. Rising oil prices are also a concern, as recent increases are beginning to be felt at the gas pump, which could hamper consumer spending. As for Europe, Greece is still struggling to negotiate its debt restructuring with creditors, and the long path to creating a more fiscally integrated eurozone is fraught with potential obstacles. Lastly, developments in China are a mixed bag of cooling GDP growth, falling property prices and political transition, making the world’s second-largest economy a wild card in the near-term outlook for global growth and market performance.
The information provided herein is as of January 20, 2012.
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