Week Ended August 28, 2015
Stocks see most volatility in four years but end with modest gain
The large-cap Standard & Poor's 500 Index ended the week with a modest gain but not before enduring the highest level of volatility in four years. The week's wild swings produced disparate results for the major equity market yardsticks, with the smaller-cap indexes roughly flat, and the technology-heavy Nasdaq Composite with a substantial gain. All of the major benchmarks sank into correction territory—or a drop of more than 10% from their highs—early in the week, a misfortune that only the Dow Jones Industrial Average and the Russell 2000 Index had suffered by the previous Friday. By the end of the week, however, all had crossed back over that threshold, and the Nasdaq Composite had even moved back into positive territory for the year to date.
China contagion continues at start of week
U.S. stocks plunged at the start of trading on Monday, with the Dow enduring its largest point decline in history (although nowhere near a record on a percentage basis). A dramatic sell-off in Chinese stocks rippled through Asian and European markets and then rattled Wall Street. Investors also reacted to a tumble in oil and commodity prices, sparked, in part, by fears about falling Chinese demand. Oil exploration and production stocks closed sharply lower, and metals shares fell even more. Risk aversion also took a toll on the fast-growing and richly valued biotechnology segment, which particularly weighed on the Nasdaq Composite.
Europe regains footing, but sentiment worsens further in U.S.
The lockstep movement of global markets broke down a bit on Tuesday—but not in a favorable way for U.S. investors. Chinese officials announced new stimulus measures, cutting interest rates and flooding the nation's banking system with liquidity. The announcement arrived after the close of another day of steep losses for the Shanghai Composite, but it appeared to help European markets regain their footing. U.S. stocks seemed to be following suit, but a morning rally faded even as investors received reassuring data about the U.S. housing market and consumer confidence. Indicative of the level of poor sentiment, a rebound in oil and commodity prices was unable to lift the majority of even energy and materials stocks—coal was the sole industry group to register a gain.
Sentiment finally turns
Several factors may have been behind a turn in sentiment on Wednesday, although it was difficult to pin down the precise factors behind the day's rally—the S&P 500's biggest daily gain in four years. T. Rowe Price traders pointed to a large merger in the beaten-down energy sector as well as further positive U.S. economic data in the form of solid durable goods orders in June and July as factors in the improved tone. Comments from Federal Reserve Vice Chairman William Dudley also appeared to deserve part of the credit. Markets turned back from a midday retreat after the key policymaker remarked that the case for rate increase in September was now "less compelling" given the unsettled state of global financial markets.
Technical factors accentuate upswing
Market dynamics, or so-called technical factors, may also have accentuated the market rebound just as they had the earlier decline. T. Rowe Price traders noted that further solid gains on Thursday were driven in part by short covering—or the move by short-term traders to buy back securities that they had sold short (borrowed and then sold, betting on the price to go down) in order to avoid losses as prices rose. A major rally in crude oil prices and a belated rebound in Chinese shares may have also boosted sentiment. News that the U.S. economy had grown at a solid 3.7% annualized rate in the second quarter, a significant upward revision to earlier estimates, also helped.
Planners urge staying focused on long-term goals
While the scale of the recent volatility has been extraordinary, T. Rowe Price U.S. equity portfolio managers were not surprised to see a market pullback following several years of significant gains that had pushed stock valuations to above-average levels. The firm's financial planners also remind investors that history suggests corrections occur on a regular basis but do not always turn into prolonged bear markets (defined by many as a decline of 20% or more). More generally, they urge investors not to panic or try to time the markets in such times of extreme volatility, but rather to stay focused on their long-term financial goals.
|Index2||Friday's Close||Week's Change||% Change
|S&P MidCap 400||1423.32||-1.63||-2.00%|
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.
Week Ended August 28, 2015
Rebound in riskier assets pushes Treasury yields higher
U.S. Treasury yields increased as a rebound in riskier asset classes, including equities and high yield bonds, helped ease investors away from safe havens such as Treasuries. (Bond prices and yields move in opposite directions.) In a Wednesday speech, Federal Reserve Bank of New York President William Dudley said that recent market volatility and concerns about foreign economies have made the case for a September interest rate increase "less compelling," which helped boost positive sentiment toward riskier assets. In addition, the Commerce Department revised its estimate of second-quarter economic growth up to 3.7% from an initial 2.3%.
China cuts rates and reserve requirements
The recent abrupt swings in financial markets seem to have stemmed from worries about flagging economic growth in China and wild volatility in that country's stock market. China's central bank cut interest rates for the fifth time since November and reduced the amount of reserves that banks must hold in order to add liquidity to its financial system. However, T. Rowe Price sovereign debt analyst Chris Kushlis believes that fiscal stimulus measures would more directly help the Chinese economy.
Late-week jump in oil price supports high yield bonds
High yield bonds recovered from a sharp sell-off on Monday to finish the week close to unchanged. On Thursday, the price of oil rose by the most in more than six years, supporting high yield bonds from energy-sector issuers. Bonds from energy-related companies account for a substantial proportion of high yield benchmark indexes. Investment-grade corporate bonds were relatively resilient in Monday's volatility, and trading took on a more positive tone as the week progressed. The volatility limited new issuance, but the market expects a rush of new deals after Labor Day.
Dollar-denominated emerging markets bonds gain
Emerging markets government debt denominated in U.S. dollars generated modestly positive returns amid the elevated volatility. However, outflows from the sector, which had been moderate over the last few weeks, accelerated significantly as a result of ongoing concerns about slowing global growth and a potential Fed rate hike. The sudden increase in oil prices on Thursday lifted sovereign bonds from developing countries that are major oil exporters.
|U.S. Treasury Yields1|
|Maturity||August 28, 2015||August 21, 2015|
This table is for illustrative purposes only. Past performance cannot guarantee future results.
Week Ended August 21, 2015
Foreign stock markets closed lower for the week ending August 21, 2015 with the broad international measure, the MSCI EAFE Index (Europe, Australasia, and Far East), losing -4.53%.
|Region/Country||Week's Return||% Change Year-to-Date|
|AC Far East ex-Japan||-6.55%||-11.66%|
|EM Latin America||-5.32%||-23.90%|
|EM (Emerging Markets)||-5.93%||-13.34%|
International bond markets in developed countries were higher this week, with the J.P. Morgan Global Government Bond Less U.S. Index gaining 1.77%.
|Region/Country||Week's Return||% Change Year-to-Date|
On the currency front, the U.S. dollar was weaker against the major currencies for the week.
Year-to-Date (U.S. $)
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).
|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|
|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.