A Note on Recent Stock Market Volatility

The financial markets in the United States and around the world have continued to exhibit sharp fluctuations. Investors are concerned about declining employment and economic growth in the United States as well as about elevated energy prices and rising inflation at home and abroad. The relatively high volatility of global financial markets also reflects the fact that the credit crunch that began in the summer of 2007 continues to bite hard.

TIAA-CREF has been carefully tracking events in global financial markets. We expect market volatility to remain relatively high over the near term. As we reported in our June 23, 2008 Market Monitor commentary, The Credit Crisis (PDF), we further expect financial institutions here and around the world to report additional losses.

The Federal Reserve Response
The Federal Reserve has been vigilant in monitoring conditions in the financial markets and has acted with several policy tools to provide adequate liquidity to the system and to support economic growth. First, the Fed has cut its target federal funds rate by 3.25 percentage points since last September. Second, the Fed has instituted a new lending facility to the banking system as a means of providing additional liquidity. Third, the Fed instituted another lending facility to provide liquidity to major nonbank financial institutions. At the same time, the Fed has been in close consultation with other leading central banks in order to more effectively monitor the financial system. More recently, the Fed has begun to consider steps to make it easier for private equity firms and others to invest in banks, providing another source of capital for the financial system.

In May the Treasury Department began mailing $115 billion in tax rebate checks to American households, as the centerpiece of the "stimulus package" legislation passed earlier this year. While we do not expect households to immediately spend the full amount, we do believe that the stimulus package will have a significant effect on economic growth in the second half of the year.

It's important to place the current situation in its proper context. Market volatility, although elevated, has been decidedly lower than during prior periods of market turbulence. In addition, the increased sophistication and globalization of the financial system is providing a degree of flexibility and responsiveness that helps the system to withstand the credit crunch. We expect this enhanced flexibility will also help bring an earlier end to the credit crunch than might otherwise be the case. However, this could take some time.  Patience and a long-term view may be necessary to navigate this period successfully.

TIAA-CREF's exposure
Throughout this period of market stress, the TIAA General Account and TIAA-CREF's fixed-income portfolios have had, and continue to maintain, low exposures to subprime mortgage-backed securities and other securities that have been the focus of investor concern. 

Please see our detailed statement on this subject, Statement on Credit Exposure in the TIAA General Account and the TIAA-CREF Fixed-Income Portfolios as of April 15, 2008, for more information.

This low exposure reflects TIAA-CREF's disciplined investment approach, rooted in careful research and fundamental analysis. We are committed to an investment philosophy that seeks to deliver consistent growth for our investors, year after year. For 90 years, we have used this investment philosophy through a variety of market cycles.

Investors should remain focused on long-term financial plans
It is particularly important in times like these to stay focused on one's long-term financial plans, rather than to succumb to the anxiety and discomfort reflected in the news. Periods like this often generate some attractively low prices for companies with favorable long-term prospects. Sticking to an investment plan may allow an investor to buy attractive assets at a discount, while selling into a crisis can actually come at a significant cost. For more on the importance of proper asset allocation, see the June 9, 2008 Market Monitor commentary, Asset Allocation in Volatile Markets. (PDF)

As in more settled times, TIAA-CREF's investment portfolio managers, analysts and staff are continuing to construct portfolios that seek to take advantage of current market conditions in order to provide consistent, long-term growth. At TIAA-CREF we believe in the merits of maintaining a diversified portfolio.* We urge investors not to let short-term turmoil in the economy or the financial markets distract them from either long-term goals or their plans to achieve them.

* Diversification cannot eliminate the risk of fluctuating prices, uncertain returns, and possible loss of principal.