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

Weekly Investment Commentary

Equities Retreat, but Long-Term Prospects Should Improve


July 27, 2015
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Key Points

  • Equities may be stuck in a trading range until uncertainties over Fed policy and global growth diminish.
  • Improving economic growth should allow corporate earnings to improve, helping stock prices to grind unevenly higher.

At the beginning of July, it became clear that Greece and European policymakers would come to at least a temporary debt agreement. Since that time, U.S. equity prices jumped, with the S&P 500 Index climbing more than 4% by the beginning of last week.1 That trend reversed last week, however, and the S&P lost about half of those gains, falling 2.2%.1 Some of the pullback can be blamed on the usual suspects — concerns over economic growth and corporate earnings, as well as worries over a pending shift in Fed policy. We would also argue that market technicals are starting to look uneven, suggesting equities may be due for a period of consolidation.

 

Weekly Top Themes

  1. Corporate earnings have been mixed, but more positive than negative trends have emerged. To date, 35% of S&P 500 companies have reported second-quarter earnings.2 The good news is that earnings are beating expectations by 5.8%, which is above the average pace since the end of the Great Recession.2 Revenues, however, remain stuck in neutral, and are only exceeding expectations by 0.3%.2 The industrials sector has been hit by lower energy prices and slowing growth in China and has been trailing the rest of the pack.
  2. Evidence continues to point to improvements in the jobs market. The latest weekly jobless claims reading shows the number dropped to 255,000.3 This marks the lowest level since 1973.3
  3. We are not expecting significant news to come from this week’s Federal Reserve policy meeting. The Fed will probably reiterate there is ongoing progress in economic growth and suggest interest rate increases remain on the horizon. We don’t think the Fed will provide a specific timeframe, but September still seems to be the most likely starting point for the Fed’s first rate hike.
  4. Issues in Greece and China have faded from the headlines, but structural problems remain. While investors may no longer be focused on the day-to-day drama, at some point these concerns may well resurface.
  5. Market technicals appear stretched. In our view, signs such as the advance/ decline line and upside/downside volume have started to trend in a negative direction over the past few weeks. This may mean nothing, but our experience suggests it may also mean that equities are due for a period of consolidation that may last several weeks or longer.
 

When Uncertainty Fades, the Outlook Should Brighten

There are a number of issues causing investor unease to remain high. Questions over Fed policy, concerns over whether issues in China and Greece will lead to broader contagion and worries about the recent downshift in energy and commodity prices top the list. The last six months have been bumpy for equities, but we believe the landscape should improve over the next year, helping equities to outperform bonds and cash.

The trend of a rising dollar/falling oil dominated the investment landscape at the end of last year before fading in the spring. But more recently, we have a witnessed a return of these issues and the recent firming of the dollar and downtick in oil prices have caused some renewed concerns. Some of the moves have to do with easing geopolitical issues (such as signs of progress in negotiations with Iran) as well as slowing growth in China. But long-term structural issues should also keep upward pressure on the dollar and downward pressure on oil prices. The good news is that unlike what happened last year, recent moves have not triggered deflationary fears and massive downward moves in global government bond yields.

Looking ahead, we expect equity prices will be driven by a better corporate earnings environment and upward movement in U.S. interest rates. Rising rates have the potential to be disruptive in the near term for equities, but should the rate increase occur in an orderly manner, we think it will be perceived as an acknowledgement of improved economic conditions. This should provide a solid backdrop for earnings.

Equities may not be particularly inexpensive compared to their own history, but we think they appear attractive relative to bonds and cash. And although markets may churn until the outlook becomes more clear, we remain cautiously optimistic toward equity markets.

 

1 Source: Morningstar Direct, as of 7/24/15
2 Source: RBC Capital Markets
3 Source: Labor Department



 

Last Week's Commentary

Equities Rise as the Focus Returns to Fundamentals


July 20, 2015
 

Key Points

  • Risks in Greece and China receded, which allowed investors to focus on the prospects for better economic growth and improving corporate earnings.
  • Global risks have not vanished, but assuming corporate earnings can rise, equity prices should be able to advance.

U.S. equities experienced their largest one-week gain since late March last week, with the S&P 500 Index rising 2.4%.1 Much of the gain came from an easing of Greece’s debt problems and a calming of volatility in China’s equity market. In both cases, policymakers achieved some breathing room, but fundamental issues remain. Greece must still engage in some serious structural reforms and the Chinese economy is still experiencing a significant slowdown. In addition to easing global tensions, U.S. equities were buoyed by positive earnings surprises that came against lowered expectations. On the negative side, June retail sales disappointed. The technology and financial sectors were the best performing areas of the market last week, while energy and materials struggled.1 In other markets, Treasuries were mixed as the yield curve flattened, while commodity prices experienced a pullback.1

 

Weekly Top Themes

  1. Weak retail sales figures show the consumer sector is still not firing on all cylinders. Sales unexpectedly fell 0.3% in June,2 although we expect to see a rebound in the data going forward. Solid levels of jobs growth and still-low energy prices and interest rates should provide tailwinds for consumer spending.
  2. A rise in industrial production shows the negative effects from weakness in oil prices may be fading. Plummeting oil prices in late 2014 resulted a sharp decline in energy-related production that persisted through the first half of 2015. In June, however, industrial production rose 0.3%, suggesting this negative economic trend may be ending.3
  3. We are seeing early signs of upward pressure on wages. We think it is inevitable that continued jobs growth and falling unemployment will raise wage pressures. And based on our conversations with corporate management teams, many companies are ramping up hiring plans at the same time that demand for high-skilled labor is growing.
  4. Signs point to Federal Reserve rate hikes starting this year. We believe the U.S. economy is accelerating. Improvements in the housing market and manufacturing are good signs, and we expect to see a rebound in consumer spending. In her testimony to Congress last week, Fed Chair Janet Yellen stated, "If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy."3 Our best guess for timing is September.
  5. Global monetary policy should remain highly accommodative for some time. When the Fed does begin to raise rates, we expect it will do so slowly. And even with a handful of rate increases, interest rates in the United States will still be very low by historic standards. Outside of the United States, many central banks are still in the midst of easing cycles. In all, monetary policy around the world should provide a boost to global economic growth.
 

A Corporate Earnings Rebound Should Lift Equities

Over the past few weeks, financial markets endured some serious risks, with the focus centered on Greece and China. Yet global equity prices remained resilient, which suggests that the years-long bull market still has legs. At the same time, global government bond yields held relatively steady rather than retreating, which may be a sign that investors are expecting global economic growth to push ahead. Encouragingly, these risks appear to be receding for now. The Greek government has given in to austerity demands, the Chinese government has stemmed the equity selloff and the nuclear deal with Iran may ease tensions in the Middle East.

At some point, one of these issues will resurface or another issue will emerge that could spark more investor unease. But for now, investors appear focused on fundamental improvements in the economy and the prospects for corporate earnings. U.S. economic data remains choppy, but points to broad improvements. And we think the prospects for corporate earnings are brightening. At this point, analysts are projecting U.S. corporate earnings will grow a paltry 1% for 2015.4 In our view, these expectations are too pessimistic. Assuming economic growth improves as we expect, we should see stronger earnings results. This should allow equity prices more room to rise.

 

1 Source: Morningstar Direct and Bloomberg, as of 7/17/15
2 Source: Department of Commerce
3 Source: Federal Reserve
4 Source: FactSet



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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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