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

Weekly Investment Commentary

Despite Escalating Volatility, U.S. Fundamentals Remain Sound

January 20, 2015
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Key Points

  • Equity markets are likely to remain vulnerable until oil prices stabilize.
  • Investor sentiment has become depressed, but we think it is out of sync with increasing evidence of an improving global economy.
  • Fundamentals suggest that 2015 should be a positive year for global equities.

U.S. equities declined for a third straight week, with the S&P 500 Index dropping 1.2%.1 Defensive areas such as utilities and telecommunications were the best-performing sectors, while the financial sector was hit the hardest.1 Notwithstanding last week’s decision by the Swiss National Bank to remove its currency peg, the fundamental backdrop has not changed much in recent weeks. We attribute the fall in equity prices to ongoing worries about the collapse in oil prices and the ripple effect on the global financial system.


Weekly Top Themes

  1. Retail sales levels fell in December, but longer-term trends remain positive. Sales excluding gasoline dropped 0.4% last month,2 but we think it would be an overreaction to suggest that the retail sector is in trouble. Over the past six and twelve months, sales ex-gas were up 4.4% and 5.3%, respectively.2
  2. Inflation looks steady, but may be due to fall. The headline Consumer Price Index (CPI) fell 0.4% in December and core CPI was unchanged.3 Core CPI was up 0.8% year-over-year.3 Given the sharp decline in energy prices, we expect core CPI may turn negative in February or March.
  3. We believe lower oil prices produce a net benefit to the U.S. economy. Declining oil prices help consumers and users of energy. Oil producers are hurt by this trend, but this group is relatively small. Nonfarm payrolls show 140 million people are employed in the United States, with 931,000 working in the oil and gas industry.4 In other words, less than 1% of total U.S. employment is based in the energy sector.
  4. Near-term earnings trends may be disappointing, but we remain optimistic about the coming year. As the fourth quarter earnings season begins, current S&P 500 estimates are for a paltry 1% year-over-year gain, with weakness centered in the energy sector.5 Looking ahead, we believe an improving economy and healthy profit margins should help corporate earnings to rebound.
  5. The U.S. dollar may be overdue for a pullback. The dollar has rallied substantially over the past few months, due to falling oil prices plus diverging economic growth and monetary policies between the United States and other countries. We think these long-term trends will persist, but some sort of near-term consolidation or counter-rally in the dollar may occur.
  6. European growth remains under pressure. We expect the eurozone to continue to struggle as long as bank lending remains depressed, inflation remains close to zero and governments remain unwilling to increase spending. The growing possibility of additional easing action by the European Central Bank (ECB) will help, but likely won’t be enough to pull Europe out of its doldrums.
  7. Investors have a long list of events and data to react to this week. Earnings results will get their share of attention, and this week also features a rash of Chinese economic data, the President’s State of the Union address, an ECB meeting and elections in Greece.

Sentiment Falters, Yet Equities Still Look Attractive

The sharp decline in oil has contributed to a fall in equity prices and in bond yields, as it has sparked global deflation fears and undermined confidence in the global economy. The fundamental supply and demand factors behind falling prices are real, but we believe prices may have overshot and the current turmoil should diminish. The souring of investment sentiment seems out of sync with increasing evidence of economic acceleration.

The pickup in volatility is unnerving, but we encourage investors to ride out the equity market turbulence. Those with longer-term horizons may want to consider using periods of weakness to add to positions as well. We expect the coming year to be a positive one for global equities in both absolute terms and relative to Treasuries. We think both the economy and corporate earnings are strengthening, and global monetary policy remains supportive. Commodity price volatility remains a risk, and equities are likely to remain vulnerable until oil prices stabilize. We think equities will be able to overcome this risk.


1 Source: Morningstar Direct, as of 1/16/15
2 Source: U.S. Department of Commerce
3 Source: Bureau of Labor Statistics
3 Source: Deutsche Bank Research
4 Source: MRB Partners


Last Week's Commentary

Markets May Be Choppy, but Equities Should Advance in 2015

January 12, 2015

Key Points

  • Volatility rose in the first part of 2015, a trend we expect will persist through the year.
  • We believe oil prices will eventually experience a modest recovery from currently oversold levels.
  • The global economy remains uneven but should slowly recover as a result of stronger U.S. growth and aggressive policy support.

The Slide in Oil: Some Risks, but Probably More Benefits

Oil prices have now declined more than 50% since the middle of last year, with Brent crude dropping below $50 last week.1 Falling oil prices hurt oil producers but benefit oil users, and since there are far more users of oil than there are producers, the net effect of lower prices on the global economy should be positive. Falling oil prices also put downward pressure on inflation. This combination of a boost to growth and lower inflation is one reason stock prices have been rising while bond yields have been falling over the past several months.


Weekly Top Themes

  1. Jobs growth remains solid. December’s employment report showed that 252,000 new jobs were created in the final month of 2014. This brings the total number for the year to over 3 million, the best annual rate since 1999.2 The data contained no evidence that lower oil prices have depressed employment growth.
  2. Falling oil prices are hurting corporate earnings expectations. The consensus for 2015 earnings per share for the energy sector has fallen by about one-third over the past three months.3 This has caused overall corporate earnings estimates to decline, and 2015 consensus expectations are currently for an 8% growth rate.3
  3. The sharp rise in the value of the U.S. dollar could present some growth risks. Since the middle of last year, the value of the dollar has risen by close to 10%, the largest six-month move since the 2008 financial crisis.1 The magnitude and pace of the increase could translate into a modest drag on U.S. economic growth, chiefly through lower U.S. exports.
  4. The Federal Reserve appears to be on track to raise rates this year. Last week’s release of the minutes from the Fed’s December meeting show that most members believe deflationary pressure and weaker growth outside of the United States should not significantly affect U.S. growth. We expect to see the first rate hike around the middle of 2015.
  5. Divergent growth levels and central bank policies could result in uncertainty and volatility. While the U.S. and U.K. central banks are set to begin tightening, other areas are still in the midst of easing. Chinese growth appears to be slowing significantly, Russia and Brazil may be sliding into recession, Japanese growth is stagnating and Europe continues to struggle with the threat of deflation.
  6. Political discord makes the prospects for legislation uncertain. With Republicans now in control of Congress, we expect they will pass more legislation, but President Obama has made it clear he will not hesitate to veto bills with which he disagrees. There is a long list of important issues to be addressed (including energy policy, trade, health care, immigration and tax reform), but none of the issues have clear sailing ahead.
  7. Historical trends suggest this month and year may be positive for equities. Despite declines in the first three trading days of 2015, the subsequent rally means that the S&P 500 gained 0.2% over the first five days of the year (before experiencing a subsequent downturn).1 Since 1958, when the first five days were positive for equities, markets in January advanced 74% of the time with an average return of 2.2%, and full year returns were up 74% of the time with an average return of 10.4%.4

The Main Themes from 2014 Should Persist

Over the past six months, accelerating U.S. growth and diverging monetary policies have been pushing the value of the U.S. dollar higher while falling oil prices have kept inflation in check. The global economy remains troubled, but we expect it will slowly recover thanks to solid U.S. growth and aggressive policy support. We anticipate that oil prices will eventually experience a moderate rebound from oversold levels, which should provide some support for risk assets. Investment markets are likely to be more volatile in 2015 than they were last year, but we expect global equity prices and bond yields to rise over the next 12 months as the recovery gains traction.


1 Source: Morningstar Direct, Bloomberg and FactSet, as of 1/9/15
2 Source: Bureau of Labor Statistics
3 Source: Goldman Sachs Global Investment Research
4 Source: Merrill Lynch Bank of America Global Research

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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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