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

Weekly Investment Commentary

The U.S. Is Diverging From Other Developed Markets

September 15, 2014
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Key Points

  • The Fed may begin signaling a shift in policy at this week’s FOMC meeting.
  • With the eurozone and Japan struggling, U.S. growth and monetary policy are diverging from other developed markets.
  • We believe U.S. equities should continue to outperform other developed markets.

U.S. equities fell amid a relatively quiet week, with the S&P 500 Index dropping 1.1%.1 The upcoming Federal Open Market Committee (FOMC) meeting drew quite a bit of attention amid increased speculation that the Federal Reserve may start signaling its long-awaited move to increase rates. Retail sales were quite strong in August,2 and the positive reaction to Apple’s upcoming product launches dominated corporate news. The geopolitical backdrop did not seem to affect the markets, with President Obama’s statements about ISIS containing few surprises, tensions between Russia and Ukraine remaining on the back burner and reactions to the upcoming Scottish independence vote relatively muted.


The Fed May Start Signaling a Shift

All eyes will be on this week’s FOMC meeting, with many observers expecting the central bank to drop the phrase “considerable time” when discussing how long it intends to keep the fed funds rate anchored at zero. Should it do so, it would give the Fed more flexibility in its approach to monetary policy and would signal that rate increases would likely begin next year. Partially as a result of this speculation, and in part to due continuing evidence of economic strength, U.S. Treasury yields advanced last week, with the yield on the 10-year Treasury rising 17 basis points to 2.61%.3


Weekly Top Themes

  1. The U.S. economy continues to be stronger than other regions. The eurozone economy remains troubled, and the turmoil in Ukraine and related sanctions against Russia are holding back growth in that region. To be sure, recently announced easing measures by the European Central Bank (ECB) should be a positive for growth, but the near-term outlook remains uncertain. At the same time, Japan’s economy is struggling. In comparison, we believe the United States is on solid footing. Employment growth is getting better, consumer and business confidence is improving and lower energy prices are acting as a tailwind.
  2. Diverging monetary policies have been pushing the value of the U.S. dollar higher. At this point, most observers assume the Fed will begin increasing rates next year as the economy continues to improve. Across the Atlantic, the ECB is still ramping up its easing policies and we anticipate that the Bank of Japan will engage in additional easing measures as well. These differing stances are a main reason the U.S. dollar has experienced notable appreciation over the last few months.
  3. We believe U.S. Treasury yields will continue to rise over the coming months. In our view, the jump in yields last week was not an outlier. We have been forecasting that bond markets will catch up to the reality that U.S. economic growth is accelerating. At this point, we expect the yield on the 10-year Treasury to be at 3% or higher by the end of the year.

Both the Economy and Bull Market Have Room to Run

The current U.S. economic expansion and equity bull market have been underway for five years now, but we do not believe either is approaching an endpoint. Typically, economic expansions and bull markets come to an end when inflation pressures are building, which cause the Fed to begin tightening monetary policy in an effort to curb growth. We are expecting the central bank to begin gradually tightening next year, but this move would not come as a result of higher inflation, but rather as an acknowledgement of improved growth. By that basis, the expansion and bull run are far from the endgame. We do expect to see episodes of volatility and periodic equity market setbacks, but the underlying fundamental backdrop remains supportive of economic and earnings growth, which should lead to rising equity prices.

Since the current cycle began, U.S. growth has been better than that seen in other regions and U.S. stocks have outperformed other developed markets. We do not see that changing any time soon. For the last few years, investors who have been overweighting U.S. stocks have done well, and we believe this strategy continues to make sense going forward.


1 Source: Morningstar Direct, as of 9/12/14
2 Source: U.S. Department of Commerce
3 Source: Bloomberg, as of 9/12/14.

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

A Choppy Path Stretches Ahead, but It Could Favor Equities

September 8, 2014

Key Points

  • August jobs growth was a disappointment, but this takes some pressure off of the Fed.
  • Global economic growth should accelerate, and we expect to see the Fed raise rates next year.
  • We believe equities should grind higher amid more volatility while U.S. Treasuries underperform.

U.S. equities continued their winning ways, with the S&P 500 Index advancing 0.2% last week.1 Although the August employment data were somewhat disappointing, investors were cheered by strong manufacturing trends. Events outside of the U.S. also contributed to the positive tone. The European Central Bank (ECB) announced a surprise rate cut, and a cease fire agreement in Ukraine eased tensions in that region. Defensive sectors generally did better than cyclical sectors, with utilities and consumer staples performing particularly well. On the cyclical side, consumer discretionary stocks outperformed, but the energy sector suffered noticeably as a result of falling oil prices.1


Weekly Top Themes

  1. Jobs growth slowed in August. Nonfarm payrolls increased by a much-less-than- expected 142,000 last month, with the largest slowdowns coming from manufacturing and retail trade.2 On the bright side, unemployment ticked down another notch to 6.1%, and average hourly earnings advanced slightly.2 The silver lining is that the poor showing takes some pressure off of the Federal Reserve to be more aggressive about raising interest rates.
  2. Two Institute of Supply Management surveys reached new post-recession highs.3 Both the ISM manufacturing and non-manufacturing surveys trended up last month, a sign the economy is continuing to move in the right direction.3
  3. ECB easing is supporting global growth. The ECB’s unexpected announcement that it will cut interest rates by 0.1% and increase its bond-purchase programs should help both European and world growth. In the immediate aftermath of the announcement, European stocks advanced while the euro declined versus the dollar and yen.1
  4. Russia/Ukraine turmoil represents a growing risk. Notwithstanding last week’s cease fire, the conflict is hurting European growth, and the threat of additional sanctions could further undermine the region. More broadly, we see a potential risk that the turmoil could begin to affect the rest of the world economy. In particular, we are concerned about the possible negative effect on U.S. multinational earnings and U.S. exports.
  5. The United States appears set to become energy independent by the end of this decade. The U.S. is already the world’s largest producer of natural gas and is on pace to become the largest producer of crude oil within the next couple of years.4 At present, the U.S. is still importing oil, but the pace is diminishing, and more is coming from Canada and Mexico than from OPEC countries.4

Expectations for Stocks Look Better Than for Bonds

Equities and government bonds have both performed well this year. This is due in part to accommodative monetary policy and economic growth that has been fast enough to provide support, but not so fast that fears of Fed tightening have taken hold. Government bond markets have also been supported by risk aversion due to rising geopolitical tensions and pockets of disinflation fears around the globe.

But how much longer can this Goldilocks scenario continue for both asset classes? Global economic growth is clearly improving, and we believe that we will soon be at a point where growth will still be a tailwind for equities, but will also put stronger upward pressure on interest rates. We are not expecting the Fed to move rapidly or dramatically, but we do believe the central bank will begin increasing the fed funds rate next year, which should put further pressure on government bonds.

We expect the path ahead for both equities and bonds to be more choppy than what we have seen so far this year, and we also anticipate these asset classes will show more divergence. Specifically, we believe U.S. Treasuries will come under increasing pressure in the face of stronger growth and tighter policy, which may lead to underperformance. The outlook for equities varies a bit more. Should economic growth slow significantly (a scenario we believe is unlikely), stock prices could fall. Should growth continue to improve, we would expect stock prices to rise. Our current view at this point is that equities could experience returns in the high single digits in the coming years.


1 Source: Morningstar Direct, as of 9/5/14.
2 Source: Bureau of Labor Statistics.
3 Source: Institute of Supply Management and Cornerstone Macro.
4 Source: Cornerstone Macro.

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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