Robert C. Doll, CFA
Senior Portfolio Manager,
Chief Equity Strategist
Nuveen Asset Management, LLC

Weekly Investment Commentary

Equities Benefit as U.S. Growth Solidifies

November 24, 2014
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Key Points

  • Equity markets continue to hit record highs, but additional gains for the rest of the year may be limited.
  • U.S. growth is becoming more reliable, and the United States may be in a position to act as a growth engine for the global economy.

The dominant news story last week was President Obama’s announcement of new executive actions on immigration policy, but investors chose to look past any political risks and focused on the positives. Specifically, markets reacted well to signs that the European Central Bank would expand its monetary easing and to a surprise interest rate cut in China. The S&P 500 Index rose 1.2% last week, extending its winning streak to five weeks, and is now up 13% since the mid-October low.1 The materials and energy sectors led the way, while telecommunications was the only sector to finish the week in the red.1


What’s Behind the Latest Climb in Equity Prices?

A confluence of positive forces have helped equity markets advance in recent weeks. Global growth remains solid with the U.S. and China holding steady. European growth remains a weak point but may be slightly better than feared. Central bankers around the world are keeping policy accommodative. The Federal Reserve has ended its asset purchases (but its balance sheet is not shrinking), while other central banks are still in easing mode. Corporations appear healthy and are engaging in shareholder-friendly deal activity as earnings have been beating expectations. And while geopolitics remain a risk, so far those risks appear well contained.

One caveat is that given the strong advance in prices, it is possible markets have been “borrowing” from what is often a seasonally strong end-of-year period. Should this be the case, we may see limited market upside for the rest of the year.


Weekly Top Themes

  1. The U.S. economy appears to be settling in at around a 3% annual growth rate. This would represent a stronger pace than what we have seen in recent years. Yet, we are conscious of some potential warning signs, including a rising U.S. dollar and widening credit spreads, which could be viewed as negative signals.
  2. The immigration debate may be foreshadowing more gridlock for the coming years. In the near-term, the executive order from President Obama probably reduces the odds that a Republican Congress will grant the president trade promotion authority and reduces the likelihood of broad tax reform or a major budget deal. We do, however, believe the odds of a showdown resulting in a government shutdown remain low.
  3. We expect this year’s holiday shopping season will be strong. The combination of improving employment, rising real income levels and lower gasoline prices should boost consumer spending.
  4. Oil prices have been falling for a number of reasons, but we believe the most important has been the dramatic increase in recent years of U.S. crude oil production.
  5. Wage inflation could begin to rise. Wages have been static for much of the current economic recovery, and the same factors driving spending levels higher should also promote modest wage growth.

U.S. Growth May Become Self-Sustaining

Taking a step back and assessing the state of the U.S. economy, it appears to us that the United States may be in a transition phase. In the aftermath of the credit crisis, the household sector was forced to aggressively deleverage, which dragged down consumer spending. At the same time, financial institutions were unable or unwilling to extend credit, which further pressured the economy. And the growth of federal government spending has been relatively low in recent years, which has dampened overall growth.

Today, while the U.S. economy does face further headwinds, the main sectors of the economy (households, corporations, financial institutions and government) are all in much better shape than they were several years ago, which should provide a better foundation for growth in the coming years. At this point, we would say the U.S. economy is becoming self-sustaining, and additional Fed stimulus may no longer be needed. Looking ahead, the United States may be in position to act as a growth engine for the rest of the global economy.


1 Source: Morningstar Direct, as of 11/21/14

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.


Last Week's Commentary

Economic Data Continues to Impress,
Driving Equities Higher

November 17, 2014

Key Points

  • The U.S. economy is shifting into higher gear, which should help global growth improve.
  • Falling oil prices present risks, but should be a net positive for the global economy.
  • Investor unease remains high, but we believe equity prices should continue to grind higher.

Once again, a combination of solid economic data, decent earnings results and receding fears of global deflation pushed stock prices higher. The S&P 500 Index rose for a fourth consecutive week, gaining 0.4%.1 The telecommunications and technology sectors showed particular strength while utilities and energy lagged.1


Lower Oil Prices Present More Benefits Than Risks

One of the biggest financial stories over the past several months has been falling oil prices. Brent crude prices were down over 5% last week while West Texas Intermediate prices fell almost 4%.1

Falling oil and commodity prices have stoked global deflation fears and are putting pressure on energy producers (including the U.S. energy industry). Ultimately, however, we believe that falling oil and commodity prices are mostly positive for the global economy. Lower prices are boosting consumer spending, and at the end of the day we believe falling oil and commodity prices will prove to be reflationary rather than deflationary.


Weekly Top Themes

  1. We expect consumer spending will continue to rise. Retail sales for October rose 0.3% and were better than expected.2 Looking ahead, we believe the combination of an improving labor market, low inflation and falling energy prices should support additional spending increases.
  2. Those same factors are strengthening consumer confidence. The preliminary November reading of the University of Michigan/Thomson Reuters consumer sentiment index was 89.4, its highest level since the middle of 2007.3
  3. Growth outside the United States continues to struggle, with the eurozone economy only growing 0.6% in the third quarter.4
  4. Investors may be overly complacent about the timing for the first Federal Reserve rate hike. Although most anticipate the Fed will not begin increasing rates until the middle of 2015, falling unemployment and signs that wages may be starting to climb could prompt the central bank to act earlier.
  5. Political gridlock remains the norm in the aftermath of the U.S. mid-terms. The current hot topic is immigration reform, with President Obama indicating he may take executive action as early as this week and Republicans warning that such a move could jeopardize the potential for future cooperation.

An Improving U.S. Economy Should Boost
Global Growth and Equity Prices

We are one month past the 10% correction that occurred from mid-September to mid-October. In retrospect, that setback appears to have been just a brief and temporary interruption in the midst of an ongoing bull market. Markets have since recovered and have been posting new highs, yet investors remain on edge and appear concerned about the state of the economy, geopolitical uncertainties and lingering deflation threats, particularly in Europe.

Our take is that U.S. economic growth is set to improve. Lower levels of government spending over the past couple of years have been a modest headwind, but we expect spending levels to rise somewhat. More important, private sector growth has been solid and is improving. At this point, we are forecasting that gross domestic product should expand by an average of 3% over the coming quarters. This is hardly the fastest pace we’ve seen over the last several decades, but it does represent a higher gear than what the United States has experienced since the Great Recession ended.

This level of growth should be enough to provide a lift to the broader global economy. It should also be strong enough to support continued growth in corporate earnings, which, in turn, should provide a tailwind to equity prices. We expect volatility to continue and remain on the watch for risks that could result in another pullback in prices (for example, the timing of the Fed’s decision to enact its first rate hike). Over the long term, however, we are retaining our positive view toward most risk assets, including equities.


1 Source: Morningstar Direct and Bloomberg, as of 11/14/14
2 Source: U.S. Department of Commerce
3 Source: The University of Michigan/Thomson Reuters
4 Source: Eurostat

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.

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A Word on Risk
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-investment-grade bonds involve heightened credit risk, liquidity risk, and potential for default. Foreign investing involves additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. Past performance is no guarantee of future results. Certain information contained herein is based upon third-party sources, which we believe to be reliable, but is not guaranteed for accuracy or completeness.

Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen Investments, Inc.

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