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

Weekly Investment Commentary

Speculative Stock Weakness Carries Over to the Broad Market

April 14, 2014
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U.S. equities came under pressure in volatile trading last week as the S&P 500 declined 2.6%.1 The sell-off was in high growth, high valuation momentum trades. No specific catalyst for the decline was identified, as has been the case over the last several weeks, which seemed to cause investor concern. Uneasiness about crowded trades and further hedge fund risk reduction strategies may have driven the spillover to the broader market. Also, the pullback occurred despite any meaningful changes in the macro environment. We see recent actions as reducing some of the areas of speculation. China and emerging market sentiment continued to improve, Japan remained a laggard and the European Central Bank debate raged on.


Investors Appear to be Contemplating Risks

First quarter earnings season is underway and has not yet provided much direction. Earnings growth expectations continue to move further into negative territory, with mixed takeaways from results and corporate commentary. Liquidity events tend to generate sharp, multi-day sell-offs, but these are not economic events. More often than not, liquidity events provide buying opportunities for long-term investors.


Weekly Top Themes

  1. First quarter earnings will likely be unimpressive, and profit guidance is at its worst level since the height of the financial crisis.2 Estimated levels have typically bottomed close to the current numbers, and earnings per share growth following such levels has historically been above-average. Current projections may contain too much negativity considering the economic environment.
  2. The Federal Open Market Committee (FOMC) March meeting minutes provided a bright spot. Fed Chair Yellen confirmed that the upward shift in the median fed funds rate projection was not intended to signal a policy change.
  3. The University of Michigan consumer sentiment survey jumped 2.6 points to 82.6 for the preliminary April report.3 This may provide more support for a change in consumer attitudes. The increase was reported in both the middle and upper income groups, versus prior reports with only an increase in the higher income group.
  4. The federal budget deficit fell below 3% of GDP in first quarter.4 This is the lowest deficit since the second quarter of 2008. As the deficit moves lower than GDP, the U.S. debt to GDP ratio declines.
  5. The ultimate impact on global risk assets from the crisis in Ukraine should be limited. We do not anticipate major implications for European security. Volatility implications for markets may not be over, but we believe wider geopolitical relevance is overstated.

The Big Picture

Most global equity and bond markets have been range bound this year. Persistent economic uncertainty, rising geopolitical tensions and ongoing concerns about China’s financial system have made investors less interested in taking risk. Economic disappointments in the U.S. and China have been roadblocks for equities. We expect the stalemate to eventually be resolved to the upside, considering the slowly improving economic backdrop in the U.S. and Europe, flat profile for the Chinese economy and strongly pro-growth policy bias in the developed world.

The FOMC minutes confirmed the Fed has not changed its dovish views and remains hyper-sensitive to the economy. In hindsight, biotech and internet stocks were in a bubble but are coming back to earth after only modest damage to the broad market. Two key technical indicators remain supportive of U.S. equities: market breadth and narrowing corporate bond spreads. Equity conditions are still unwinding from the overbought levels of late 2013, but bumps aside, the cyclical trend is upward. U.S. sentiment has progressively become more optimistic in the past year. We think U.S. GDP acceleration in the spring will enable earnings to increase and the equity bull market to resume. We expect a stair step rise in bond yields and fed funds rate expectations as growth improves.


1 Source: Morningstar Direct, as of 4/11/14.
2 Source: FactSet, “Earnings Insight,” April 11, 2014.
3 Source: Thomson Reuters, “Surveys of Consumers University of Michigan April 2014 Preliminary,”
4 Source: Congressional Budget Office, “The Budget and Economic Outlook: 2014 to 2024,” February 4, 2014,

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

Does the Market Decline on Friday Signal a Pullback?

April 7, 2014

U.S. equities finished mostly higher last week with the S&P 500 increasing 0.4%.1 A sharp sell-off on Friday tempered earlier gains and sent the NASDAQ into negative territory for the week.1 Support for the advance was attributed to dovish comments from Fed Chair Yellen, early signs that weather has not impeded underlying recovery and China’s stimulus dynamics. Deeper cyclical pockets of the market largely outperformed, consistent with better sentiment for the economic recovery. Emerging markets extended their recent increases. Momentum investments came under renewed pressure. A rotation from growth to value should benefit if the recovery gains traction and rates move higher. In our minds, the next few trading days are critical. The abrupt downturn on Friday, coupled with an exhausted market, make us believe that in the near term stocks will likely trade sideways.


Warming Trends

The transition to warm weather is finally here. March data is coming in stronger, and we anticipate a string of more positive reports. Order backlogs, a forward-looking measure of manufacturing activity, increased sharply in March to a three-year high, a positive sign of underlying strength.2 Motor vehicle sales in March surged to the highest pace of annual sales in seven years.3 March job growth returned to levels in line with previous averages before winter took its toll.4 First quarter real GDP growth is tracking at an annual rate of approximately 1.5%.5 We expect a pace of more than 3% in the second quarter as data rebounds.


Weekly Top Themes

  1. The solid March employment report reflected a slightly above-trend increase in payrolls.6 Increases occurred in household employment, average work week and labor force participation. Private payroll employment hit a new all-time high. The new data demonstrates progress, yet since the report was in line with expectations, policymakers and investors are unlikely to change their approaches.
  2. Risks in China are a near-unanimous concern among investors. The key question centers on China’s credit situation. The high and rising leverage ratio is somewhat a reflection of the country’s high domestic savings and financial intermediation dominated by the banking system. Pressure to de-lever and policy constraints are economic headwinds, but a material growth slowdown is not likely because of ample resources and policy maneuvering.
  3. First quarter earnings seem to have been negatively affected by weather disruptions, currency and emerging market weakness. Quarterly pre-announcements reflect a tough quarter, with guidance to be watched more closely than over the last several quarters.

The Big Picture

Our view remains that investors will finally receive evidence of a sustainable but moderate global economic recovery. This will provide ongoing support for U.S. and global equities, trigger another upturn in G7 bond government yields and encourage investors to continue rotating out of cash and bonds into equities and other growth investments. Fed tapering and the eventual start of rate hikes will inject periodic volatility into capital markets but should not derail the rise in stock prices or bond yields. Geopolitics will remain a source of near-term angst. Concern about China will linger, although we believe fears of a credit bust are exaggerated. We expect reasonably steady growth that should permit the developed market economic recovery to gather pace and eventually spread to parts of the emerging world. An improving global economy bodes well for corporate earnings and should provide support for the stock market. Equities could be range bound until increased earnings are clearly evident, but prices should eventually trend higher. Periodic setbacks should be limited in magnitude and duration, although volatility will remain higher than over the past year. We view weakness as a buying opportunity and favor a moderately pro-cyclical stance.


1 Source: Morningstar Direct, as of 4/4/14.
2 Source: Institute for Supply Management, March 2014 Manufacturing ISM® Report On Business,® April 1, 2014, cfm
3 Source: Auto Alliance, Auto Jobs and Economics, “2013 Jobs Report,”
4 Source: Bureau of Labor Statistics, “The Employment Situation – March 2014,” April 4, 2014,
5 Reuters, “U.S. GDP Revised Down, but Hints of Economic Thaw Emerge,” February 28, 2014,
6 Bureau of Labor Statistics, “The Employment Situation – March 2014,” April 4, 2014,

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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