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

Weekly Investment Commentary

Global Economic Conditions Should Improve from Here


May 4, 2015
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Key Points

  • U.S. economic growth stalled in the first quarter, but should regain traction in the coming months.
  • We expect the Fed will press ahead with rate increases later this year.
  • On balance, we believe the macro backdrop argues for overweight positions to equities in investors’ portfolios.

The major events last week included a weak first quarter gross domestic product report, a Federal Reserve policy meeting and indications toward a compromise over Greece’s debt issues. For the week, U.S. stocks declined, with the S&P 500 Index falling 0.4%.1 Oil prices continued to recover, which helped energy stocks, while biotechnology and small cap stocks sold off. In other asset classes, European bond yields rose noticeably, which put upward pressure on U.S. Treasury yields.1 The euro also rallied strongly.1

 

Weekly Top Themes

  1. Economic growth slowed significantly in the first quarter. The first quarter GDP report showed the U.S. economy expanded at only 0.2%.2 Exports fell by 0.7%, reflecting overseas weakness and the stronger U.S. dollar.2 Investment in nonresidential structures fell 23% as a result of the harsh winter.2
  2. In our view, at least some of this weakness should be temporary. We expect the effects of the winter weather and West Coast port strikes will fade. We also believe that the benefits of lower energy prices will provide a boost to growth via an increase in consumer spending. Decent employment growth and still-low interest rates should also help the economy regain traction.
  3. On balance, last week’s Fed meeting was a non-event. There was no change to the Fed’s forward guidance or to the outlook for moderate growth. The central bank did acknowledge weaker growth, but attributed it to “transitory” factors. We continue to believe September remains the most likely timeframe for the start of a rate increase cycle.
  4. Corporate earnings are beating lowered expectations. With over 70% of companies reporting first quarter earnings, results have surpassed expectations by an average of 7%.3 At this point, earnings are up 3% for the quarter, with strength coming from the technology and health care sectors.3 Were it not for the energy sector, earnings would be up 9%.3
  5. Wages appear to be accelerating. Monthly jobs reports had been pointing to upward wage pressures, and the first quarter Employment Cost Index that was released last week confirmed it. The Index was up 0.7% for the quarter and rose 2.6% year over year,4 indicating that reduced slack in the labor market has been putting upward pressure on compensation.
 

Volatility May Remain Elevated, but Conditions Favor Equities

U.S. growth slowed and basically stalled during the first quarter as exports contracted and as consumer and business spending weakened. Looking ahead, we think growth will rebound, with the consumer sector in particular gaining strength. Solid income and employment growth, lower energy prices and improved confidence should all provide a boost to consumer spending. The Fed should start increasing rates later this year, but should do so gradually and modestly, meaning rate increases shouldn’t undercut economic growth. Outside of the United States, conditions also appear to be improving. We believe the odds are growing that a deal will be struck to help keep Greece in the eurozone. While Chinese growth looks to be slowing, other regions (Europe in particular) should strengthen.

So far this year, equities have held their ground in the face of softer growth and declining earnings expectations. Volatility levels have risen a bit in recent months and we think volatility will remain moderately elevated. The extreme rally in the dollar and the precipitous decline in oil prices that began in mid-2014 appear to have been overdone and are starting to reverse. This is causing investors to scramble to reposition their portfolios. The pending shift in Fed policy is also causing some measure of market turbulence.

We expect both economic and earnings growth to improve in the coming months, which should result in a strengthening tailwind for equities. We also expect these same factors to put increased pressure on government bonds, especially since inflation levels are starting to rebound. As such, we continue to favor equities within multi-asset-class portfolios, believe government bonds will be pressured by rising rates and would suggest underweight positions in commodities.

 

1 Source: Morningstar Direct and Bloomberg, as of 5/1/15
2 Source: Bureau of Economic Analysis
3 Source: J.P. Morgan
4 Source: Bureau of Labor Statistics



 

Last Week's Commentary

Equities Should Push Higher Along a Bumpy Road


April 27, 2015
 

Key Points

  • Earnings have been beating expectations, but those expectations have been lowered.
  • Both global growth and corporate earnings should slowly improve over the coming months and quarters.
  • Equities face several risks, which should cause volatility to advance, but we expect prices to continue to rise.

Investors mostly focused on the positives last week. Corporate earnings generally beat expectations and merger and acquisition activity remained solid. Despite disappointing economic data, this trend reinforced the perception that the Federal Reserve would hold off on rate hikes for the time being. The turmoil in Greece rattled investors, but remains relatively contained. For the week, the S&P 500 Index rose 1.8%, with the technology and telecommunications sectors leading the way.1 Energy and consumer staples were the chief laggards.1

 

Weekly Top Themes

  1. Earnings are exceeding lowered expectations, but the energy sector remains a drag. With about 40% of the S&P 500 companies reporting results, earnings are beating expectations by 5.5%, while revenues are missing by around 1%.2 Were it not for the energy sector, earnings would be up close to 8%.2
  2. We are not expecting significant changes from this week’s Fed meeting and believe rate hikes will begin in September. The Fed will likely acknowledge a first-quarter slowdown in economic growth and the labor market. However, with core inflation starting to creep higher and financial conditions looking good, the Fed should still be on track to raise rates later this year. When it does so, we think the central bank will be slow and deliberative, as the fed funds rate climbs gradually to 1% or slightly higher.
  3. Global monetary policy remains in an easing mode. Outside of the United States, policy easing continues with the impact varying by country. In China, for example, we do not believe policy support will accelerate growth, but it should moderate the slowdown. In Europe, the massive quantitative easing program should boost growth.
  4. Equities have accelerated since the end of the global financial crisis despite disappointing global economic growth. A combination of significant deleveraging and a global collapse in productivity has limited economic growth over the past several years despite unprecedented stimulus. Nevertheless, equities have enjoyed an extended bull market mainly because slow wage growth pushed earnings higher and an abundance of liquidity propelled investors into higherrisk assets.
  5. The bull market in U.S. stocks recently celebrated its sixth birthday, but age alone will not derail the advance. There is no magic number of years at which bull markets end. Fundamentals, the economic backdrop and investor sentiment all matter far more than an arbitrary age. We believe these factors point to more time and more price advances for this bull market.
 

Economic Growth and Earnings Should Regain Traction

The first few months of the year were marked by disappointing economic data and deteriorating earnings expectations that put U.S. equities into a choppy holding pattern. We expect economic growth to improve from here as the temporary effects of a harsh winter fade and consumer spending gradually accelerates. Earnings have been hit by the precipitous drop in oil prices and pressure from the rising U.S. dollar. In our view, profit growth should begin to improve as stabilizing oil prices settle the energy sector and non-energy earnings reflect the delayed benefit of cheaper oil. Assuming the advance in the dollar levels off and global growth continues to firm, we forecast a brighter environment for earnings in the coming months.

Such a backdrop should allow equity prices to advance, but the road ahead will be rocky and not without risks. The threat of a Greek debt default and a messy exit from the eurozone is much in the minds of investors right now. The ongoing negotiations may cause market turmoil, but we believe the most likely outcome is some sort of compromise that leaves the eurozone intact. The pending start of the Fed’s rate hike cycle is likely to result in increased bond yields and heightened volatility in the equity market. But we don’t believe this shift will derail the bull market given a healing economy and an accommodative global monetary policy environment. We think the balance of risks remain favorable for equities and continue to advocate a pro-equity, pro-growth investment stance.

 

1 Source: Morningstar Direct, as of 4/24/15
2 Source: RBC Capital Markets



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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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