The elevated volatility characteristic of global financial markets during the latter part of 2007 and the beginning of 2008 is continuing. As is common during periods of market stress investors are exhibiting a "flight to quality" whereby securities perceived as riskier are sold off and securities with the lowest risk characteristics are purchased. A flight to quality is typically characterized by increased investor demand for the very safest securities – U.S. Treasury securities – as these securities have the most certain returns. Investor behavior during the current period reflects this long-established trend.
The speed with which these market movements have occurred may appear unsettling but is probably reflective of the greater connectivity of the global economy in general and global capital markets in particular. As a result investor decisions to re-evaluate their tolerances for risk are transmitted with greater speed and can result in rapid market movements. Simply put, at the moment investors are currently deciding to pay lower prices for many classes of risky assets; ranging from equities to many types of fixed-income securities. This re-pricing of risky assets is a common characteristic of periods of elevated market volatility.
The Federal Reserve acting to cut the target Federal Funds rate by 75 basis points is tangible evidence that the Fed is committed to pro-actively supporting economic growth as well as ensuring adequate liquidity and the smooth functioning of financial markets in the U.S. We expect that the Fed will continue its pro-active stance and will continue to cut the target Federal Funds rate if incoming economic data indicate further weakness in the U.S. economy.It is important for investors to bear in mind that this period of market stress, while uncomfortable, is by no means the first and will not be the last. Current market volatility is no reason to fundamentally re-think a solid long-term investment plan. A common mistake investors make in periods of market stress is to sell when sentiment is negative. Similarly, in periods of market euphoria investors often buy when valuations are at their highest. This type of market timing activity is almost always counterproductive and destructive to long-term investment goals and should be avoided.
For the investment professionals at TIAA-CREF the volatile global financial markets present opportunities as well as challenges. The professional investment staff is working actively to construct portfolios with potentially optimal risk-adjusted return characteristics given current market conditions. The analysts and portfolio managers at TIAA-CREF take a forward-looking view. At TIAA-CREF we believe in the merits of long-term investing and urge investors to refrain from focusing excessively on short-term market movements.
© 2009 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
