William Riegel, Head of Equity Investments
Lisa Black, Head of Global Public Fixed-Income Markets
June 15, 2012
Gloom and optimism took turns dominating the equity markets during the past week, with Europe’s debt crisis and further signs of weakening in the U.S. economy keeping investors on edge. Later in the week, fear was trumped by hope that the Federal Reserve and other central banks around the world would take decisive action to boost growth and ensure liquidity in the markets. Month-to-date though June 14, the S&P 500 Index was up 1.52%, while foreign and developed markets returned 2.20% and 1.10%, respectively, based on MSCI indexes.
Most fixed-income markets were in a holding pattern. The 10-year U.S. Treasury yield, which has traded within a narrow range between 1.60% and 1.67% since June 6, closed at 1.64% on June 14. Performance has been flat across U.S. investment-grade bond sectors, as measured by the -0.09% month-to-date return of the Barclays U.S. Aggregate Bond Index through June 14. However, agency mortgage securities have benefited somewhat from the increasing likelihood that the Federal Reserve may begin to buy mortgages to help stimulate the economy. Fund flows remained broadly positive for investment-grade corporate bonds.
Spain and Greece share the spotlight in Europe’s long-running debt drama
Developments in Spain and Greece dominated market fears about Europe during the week:
Markets rise as policy responses seem inevitable
Given global stresses and collective angst, policymakers are under immense pressure to act—so much so that global equity markets began to rally on June 14 on the belief that some form of central bank intervention had become inevitable. Signs of potential policy moves included:
Further weakening in the U.S. adds to pressure for Fed action
Within the U.S. in particular, worsening economic data during the past week made it clear that something needs to happen on the policy front.
The lack of U.S. inflation should allow the Fed more room to engage in further easing operations. This could take the form of extending the "Operation Twist" program, outright purchases of Treasuries and mortgages, or both.
Some glimmers of economic optimism
Not all of the U.S. and global economic headlines represent gloom and doom.
Technical indicators suggest equity market may be bottoming, ready to rebound
The odds of an equity market upturn look favorable, given the prospects for global action by policymakers, combined with extremely bearish investor sentiment. Hedge funds’ net exposures to equities are back to their 2011 lows, while fund flows into less-risky mutual funds are at levels seen during periods of market stress in 2010 and 2011.
A number of technical factors suggest that equities are bottoming:
On balance, equity markets appear coiled to spring and await only a trigger to do so. In light of prevailing sentiment and expectations for policy action on a global scale, we believe such a trigger may happen soon.
The information provided herein is as of June 15, 2012.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
Past performance is no guarantee of future results.
Please note that equity investing involves risk.