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

Weekly Investment Commentary

A Mid-Year Assessment of Our Ten Predictions

June 29, 2015
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We have described 2015 as the year when investors transition from disbelief to belief, or from skepticism to optimism. Sir John Templeton coined the phrase, "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." We believe we are entering the "optimism" phase. 2015 is on track to be another decent year for U.S. equities as we experience (1) solid momentum in U.S. economic growth with low inflation, (2) a pickup in consumer spending based on job growth, confidence and a positive wealth effect, (3) solid earnings growth, (4) stimulus from low commodity prices and financing costs and (5) a still-good liquidity environment aided by stimulus from non-U.S. central banks. We believe these statements largely hold true, as reflected in the predictions we made at the beginning of the year:

01 Wrong Direction U.S. GDP grows 3% for the first time since 2005

Although we still believe the U.S. will grow 3% for the rest of the year, the weak first quarter will make it difficult for the year as a whole to average 3%.

02 Right Direction Core inflation remains contained, but wage growth begins to increase

Inflation appears to be bottoming as it moves from very low to low levels.

03 Too Early to Call The Federal Reserve raises interest rates, as short-term rates rise more than long-term rates

Both short- and long-term bond yields have started to rise in anticipation of Fed rate hikes,1 which we expect will begin in September.

04 Correct The European Central Bank institutes a large-scale quantitative easing program

This happened in January, and the effects are being felt in Europe, where growth is improving to some degree.

05 Right Direction The U.S. contributes more to global GDP growth than China for the first time since 2006

As a result of U.S. growth improving and China’s growth slowing, this one is heading in the right direction.

06 Too Early to Call U.S. equities enjoy another good yet volatile year, as corporate earnings and the U.S. dollar rise

This is the seventh year of the bull market in the United States. The S&P 500 Index has never risen for seven consecutive calendar years,1 yet this is a distinct possibility in 2015, even if only by a modest amount.

07 Right Direction The technology, health care and telecom sectors outperform utilities, energy and materials

If we were scoring these predictions in degree of correctness, this would be at the top of the list. As of last week’s market close, our favored sectors are up an average of 6.6% for the year while the other three are down 3.7%.1

08 Too Early to Call Oil prices fall further before ending the year higher than where they began

Oil fell earlier in the year before experiencing a recovery. If the year ended today, this one would be proven correct.

09 Wrong Direction U.S. equity mutual funds show their first significant inflows since 2004

Equity mutual fund flows have actually been negative so far this year as investors have been moving out of stocks.2 We expect investor confidence will pick up and that flows will increase, but we will likely be on the wrong side of this prediction.

10 Too Early to Call The Republican and Democratic presidential nominations remain wide open

The list of Republican candidates is longer than virtually anyone predicted. While Hillary Clinton remains the Democratic front runner, her candidacy is not without its difficulties.


Looking Ahead

While U.S. equities are no longer table-poundingly cheap, we believe they offer better value than other financial assets and should outperform cash, bonds, inflation and commodities. Even though equities are likely to advance further, the pace of gains is likely to be slower than what investors experienced during the first six years of this bull market. We believe equities are likely to produce average annual returns somewhere in the mid-to-high single digit range. Within the equity market, we prefer mid-cycle cyclicals, companies that can generate positive free cash flow and those with higher levels of domestic earnings.


1 Source: Morningstar Direct, Bloomberg and FactSet as of 6/26/15
2 Source: Investment Company Institute


Last Week's Commentary

Equities Gather Momentum on Positive Indicators

June 22, 2015

Key Points

  • Leading global economic indicators point to improving signs for growth.
  • Fed monetary policy decisions remain deliberate and measured.
  • Corporate profit expectations should gradually strengthen later this year, which should be positive for equities.

U.S. equities finished higher last week as the S&P 500 increased 0.8%, recording its highest weekly gain since April.1 The dovish message from Wednesday’s FOMC announcement boosted markets. Contagion from Greece appears relatively contained. The sell-off in equities in China did not impact global markets. The health care, consumer staples and utilities sectors rallied. Financials lagged as banking lost momentum and energy underperformed.


Weekly Top Themes

  1. The FOMC statement acknowledged several improvements, most notably in labor markets. Consumer spending and housing were also cited as favorable trends. In spite of positive signs, a lingering weakness exists in business fixed investment and exports.2 Projections suggest the Committee continues to debate whether to hike rates once or twice in 2015. In our view, September remains the most likely timeframe for a rate increase liftoff.
  2. The struggles in Greece should continue for some time. Greece will likely have issues paying its debts and may engage in ongoing back and forth with creditors. The country will focus on securing a solid deal with the intention of remaining part of the eurozone.
  3. A cyclical bounce may be emerging. Recent stronger cyclical reports began with April’s housing data in mid-May.3 According to ISI, 87% of cyclical indicators have been positive since then. Unemployment claims and updates to the Philadelphia Fed Survey support a bounce. The leading economic indicators rose 0.7% in May and suggest healthy growth over the next six to nine months.4
  4. The U.S. consumer is key to improved U.S. economic growth and earnings. U.S. consumer spending is being supported by solid employment growth, slow but accelerating wage gains, increases in consumer net worth and rising expectations that real income will improve.5
  5. Consumer inflation expectations and actual prices are accelerating slowly. So far this year, core inflation as measured by Consumer Price Index (CPI-U) is climbing at nearly a 2.5% annual rate.6 This is almost enough to move the core Personal Consumption Expenditures (PCE) deflator up to 2.0%,6 which is the key measure for the Federal Reserve.

An Earnings Rebound Could Benefit Equities, Despite Risks

U.S. equities have been resilient while the underlying bull market remains intact. The unwinding of last year’s deflation trade has caused bond yields to spike higher in recent months, which has spurred a rotation from bond-like investments, such as utilities, into financials. The looming start of the Fed rate cycle represents a potential bump in the equity market advance, but the current risk-reward potential supports remaining invested rather than standing aside. Fed policy should remain accommodative even as rates start to rise. Improvement in the economy and earnings growth imply that equities can continue to climb despite the risk of a correction. A Greece default or exit from the Economic and Monetary Union pose a threat for equities because of the potential for significant contagion, especially in the euro area. We anticipate that Greece’s debts will be rolled over and its membership maintained, thus avoiding a meaningful disruption to capital markets.

Global earnings slumped in the second half of last year but are beginning to rebound and should continue to recover as economic growth improves. The deterioration in earnings reflected the dramatic decline in the energy sector due to falling oil prices, residual weakness in the euro area and emerging markets, weak overall growth in the United States and the surge in the U.S. dollar. Looking ahead, the earnings picture should brighten as those headwinds fade. Forward earnings estimates were downgraded sharply, led by the drop in energy, but profit expectations should gradually strengthen later this year. Earnings for non-energy companies should begin to reflect stimulus from lower oil prices and an ongoing economic recovery. Although equities are not inexpensive in relative terms, we expect earnings will improve and monetary policy will stay reflationary, which should preclude material risks.


1 Source: Morningstar Direct, as of 6/21/15
2 Source: Federal Reserve
3 Source: Census Bureaus
4 Source: The Conference Board
5 Source: Bureau of Labor Statistics and Bureau of Economic Analysis
6 Source: Bureau of Labor Statistics

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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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