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

Weekly Investment Commentary

Equities Climb as Investors Focus on Fundamentals

August 25, 2014
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Key Points

  • Equities have recovered all of the losses experienced in July through early August.
  • The Fed appears to be slowly paving the way for interest rate increases, but we’re not expecting any immediate changes.
  • The global economy is growing, but remains weak. In this environment, we believe investors should be more selective.

U.S. equities experienced a second week of strong gains, with the S&P 500 Index rising 1.8% and finishing the week near an all-time high.1 Cyclical sectors broadly outperformed, with the industrials, financials, technology and consumer discretionary sectors all posting gains of more than 2%.1 Investor attitudes have changed from where they were earlier in the month when we saw a broad sell-off of stocks driven by renewed concerns around Federal Reserve policy and rising geopolitical tensions. At this point, equities are now nearly 4.5% higher than their early-August lows.1


The Fed Appears to Acknowledge Stronger Growth

Last week’s Fed conference at Jackson Hole garnered some attention, as Fed Chair Janet Yellen focused on improving economic data. Overall, the tone of her speech was fairly balanced and we don’t believe any policy changes are immediately forthcoming. However, she did note the faster-than-expected improvement in the labor market and pointed out that the overall pace of economic growth is getting closer to the central bank’s objectives.

At the same conference, European Central Bank (ECB) President Mario Draghi suggested that the ECB would continue to adopt additional easing stances. He discussed the need for more growth-friendly fiscal and structural reforms for Europe and pointed out the growing divergence between U.S. and eurozone policies.


Weekly Top Themes

  1. The labor market is strengthening. Unemployment claims fell last week,2 continuing a months-long trend of better jobs data. Employment indicators are perhaps the most important data sets for capital markets, so investors are rightfully viewing this trend as friendly for equity markets.
  2. The housing market is also improving. July housing starts were reported at a much-better-than-expected 1.1 million units.3 Housing is a fundamental driver for the economy and ongoing growth in the labor force should continue to promote housing activity.
  3. Manufacturing levels are increasing as well. The Manufacturing Purchasing Manager’s Index reached its highest level since April 20104 and the Philly Fed Survey reached its highest point since March 2011.5
  4. The Fed is slowly adopting a more hawkish tone. The central bank is starting to focus on the improved pace of economic growth.
  5. The odds of a Republican takeover of the Senate are rising. Given the combination of what looks to be a strong slate of Republican candidates and a difficult political environment for Democrats, we peg the odds of the GOP capturing the Senate at 60%. Should that occur, we believe it would have a limited effect on financial markets as a whole, but it could benefit some areas of the energy, health care and defense industries.

Expect a Low-Growth, Grind-Higher World

The global economy is expanding, but a couple of the key drivers from the past have been fading. Last decade, global growth was largely driven by U.S. consumption and Chinese investment, both of which have diminished as U.S. households are saving more and as the Chinese economy has slowed and become less reliant on investment spending. It appears to us that the world economy’s dominant problem is lower levels of demand compared to what we once saw, and this environment does not appear set to change any time soon.

Nevertheless, economic growth is accelerating (especially in the United States), and monetary policy remains accommodative. With this backdrop, we expect equities to continue to grind higher while experiencing occasional pullbacks. In such a low-growth, grind-higher world, investors may want to be cautious about taking on more risk to achieve higher returns. Instead, given that we believe correlations between different investments are falling, we suggest it makes sense to invest more, and to be more selective and more active.


1 Source: Morningstar Direct, as of 8/22/14.
2 Source: Department of Labor.
3 Source: U.S. Census Bureau
4 Source: Institute for Supply Management.
5 Source: Federal Reserve Bank of Philadelphia.

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

Tug of War Continues Between Fundamentals and Geopolitics

August 18, 2014

Key Points

  • Important progress in the global recovery, U.S. labor market and corporate earnings has been masked by geopolitical tensions.
  • The conflict involving Russia could have a significant impact on the eurozone and global growth.
  • Market volatility is likely to increase in the short term, causing headwinds for risk assets.

U.S. equities finished higher last week with the S&P 500 increasing 1.3%.1 A relatively steady tone continued in spite of the weakness in global economic data. Fed dynamics were viewed as somewhat supportive. The geopolitical backdrop seemed more favorable for global risk appetite, however, renewed volatility surrounding the crisis in Ukraine reversed an early rally on Friday, fueling a bond rally. Health care and technology were among the best performers. Energy was the only sector to finish negative, as oil fell for a fourth straight week.1


Favorable Environment Offset by Areas of Caution

The overall environment is largely represented by strengthening global economic growth, improving corporate earnings and profits, as well as relatively reasonable equity valuations. Federal Reserve (Fed) officials have recently become concerned about pockets of illiquidity in the repurchase agreement (repo) market. Repos are equivalent to the plumbing of the global financial system, and holders of government securities use repos as a source of overnight borrowing. Liquidity questions are a headwind for the Fed, and possible turbulence could result once the fed funds rate moves beyond 0%.

The turmoil involving Russia and escalating sanctions are weighing on the eurozone economy, placing global growth at risk. Eurozone business confidence has declined, which to us indicates early signs of a slowdown. Japan reported extremely weak GDP data, signaling a slide back into recession.2 Other countries in recession include Italy, Portugal, Russia and Ukraine. Countries at risk are France, Brazil, much of Latin America and potentially Germany.


Weekly Top Themes

  1. Industrial production increased in July, exceeding expectations. Production increased 0.4% and manufacturing output expanded 1.0% for the month.3
  2. Initial unemployment claims increased. Weekly claims rose by 21,000, which was a disappointment compared to expectations.4
  3. Wage growth typically accelerates in the second half of a business cycle. U.S. wage growth appears to have developed momentum, indicating tighter monetary policy should be on the way.
  4. The large budget deficit reductions in recent years are starting to slow. This is occurring as the Fed is exiting its asset purchase program.
  5. The equity market continues to emphasize stock selection as not all stocks are rising together. Technology holds the leadership position.

Risk Assets Prepare for a Bumpy Ride

Equities have cooled off after a strong spring rally. The strengthening labor market has reintroduced an element of monetary policy uncertainty, despite the Fed’s plans to keep rates lower for longer. While interest rate hikes are not imminent, debate about the timing of the first move will probably intensify as the labor market expands. As a result, risk tolerance has waned somewhat, and high levels of leverage virtually assure increased volatility. So far, this has manifested itself in outflows in the high yield corporate market, pushing spreads wider. The U.S. dollar is under upward pressure due not only to heightened geopolitical risks and investor inflows resulting from perceived safe haven potential, but also from U.S. economic and interest rate expectations breaking out relative to the rest of the world.

U.S. equities were primarily driven by valuation expansion throughout 2012 and 2013. Now, profits are showing signs of renewed vigor, however, we expect additional stock market volatility over the next few months as the appetite for risk assets diminishes. Concerns have escalated that the eurozone could move back into recession because of uncertainty around the standoff with Russia and the potential for increased sanctions. Euro area equities led on the downside and the euro has weakened, although fortunately global contagion has not yet been meaningful.


1 Source: Morningstar Direct, as of 8/15/14.
2 Source: Bloomberg.
3 Source: Federal Reserve.
4 Source: U.S. Department of Labor.

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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