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

Weekly Investment Commentary

Economic Data Continues to Impress,
Driving Equities Higher


November 17, 2014
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Key Points

  • The U.S. economy is shifting into higher gear, which should help global growth improve.
  • Falling oil prices present risks, but should be a net positive for the global economy.
  • Investor unease remains high, but we believe equity prices should continue to grind higher.


Once again, a combination of solid economic data, decent earnings results and receding fears of global deflation pushed stock prices higher. The S&P 500 Index rose for a fourth consecutive week, gaining 0.4%.1 The telecommunications and technology sectors showed particular strength while utilities and energy lagged.1

 

Lower Oil Prices Present More Benefits Than Risks

One of the biggest financial stories over the past several months has been falling oil prices. Brent crude prices were down over 5% last week while West Texas Intermediate prices fell almost 4%.1

Falling oil and commodity prices have stoked global deflation fears and are putting pressure on energy producers (including the U.S. energy industry). Ultimately, however, we believe that falling oil and commodity prices are mostly positive for the global economy. Lower prices are boosting consumer spending, and at the end of the day we believe falling oil and commodity prices will prove to be reflationary rather than deflationary.

 

Weekly Top Themes

  1. We expect consumer spending will continue to rise. Retail sales for October rose 0.3% and were better than expected.2 Looking ahead, we believe the combination of an improving labor market, low inflation and falling energy prices should support additional spending increases.
  2. Those same factors are strengthening consumer confidence. The preliminary November reading of the University of Michigan/Thomson Reuters consumer sentiment index was 89.4, its highest level since the middle of 2007.3
  3. Growth outside the United States continues to struggle, with the eurozone economy only growing 0.6% in the third quarter.4
  4. Investors may be overly complacent about the timing for the first Federal Reserve rate hike. Although most anticipate the Fed will not begin increasing rates until the middle of 2015, falling unemployment and signs that wages may be starting to climb could prompt the central bank to act earlier.
  5. Political gridlock remains the norm in the aftermath of the U.S. mid-terms. The current hot topic is immigration reform, with President Obama indicating he may take executive action as early as this week and Republicans warning that such a move could jeopardize the potential for future cooperation.
 

An Improving U.S. Economy Should Boost
Global Growth and Equity Prices

We are one month past the 10% correction that occurred from mid-September to mid-October. In retrospect, that setback appears to have been just a brief and temporary interruption in the midst of an ongoing bull market. Markets have since recovered and have been posting new highs, yet investors remain on edge and appear concerned about the state of the economy, geopolitical uncertainties and lingering deflation threats, particularly in Europe.

Our take is that U.S. economic growth is set to improve. Lower levels of government spending over the past couple of years have been a modest headwind, but we expect spending levels to rise somewhat. More important, private sector growth has been solid and is improving. At this point, we are forecasting that gross domestic product should expand by an average of 3% over the coming quarters. This is hardly the fastest pace we’ve seen over the last several decades, but it does represent a higher gear than what the United States has experienced since the Great Recession ended.

This level of growth should be enough to provide a lift to the broader global economy. It should also be strong enough to support continued growth in corporate earnings, which, in turn, should provide a tailwind to equity prices. We expect volatility to continue and remain on the watch for risks that could result in another pullback in prices (for example, the timing of the Fed’s decision to enact its first rate hike). Over the long term, however, we are retaining our positive view toward most risk assets, including equities.

 

1 Source: Morningstar Direct and Bloomberg, as of 11/14/14
2 Source: U.S. Department of Commerce
3 Source: The University of Michigan/Thomson Reuters
4 Source: Eurostat

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

Global Growth Should Accelerate,
Providing a Tailwind for Equities


November 10, 2014
 
 

Key Points

  • Economic data is improving and earnings remain strong, factors that have propelled equities higher.
  • Global growth and monetary policy continue to diverge, with the U.S. showing stronger results.
  • With risks to global growth receding, we believe equities can continue to make gains.


Equity markets climbed higher for a third consecutive week as the S&P 500 Index advanced 0.7%.1 Fears about global growth that caused last month's 10% market correction continued to diminish, and investors focused on corporate earnings, solid economic data and the mid-term elections. The consumer staples, industrials and utilities sectors led the way last week, climbing more than 1%, while the consumer discretionary and health care sectors lagged the broader market.1

 

Differing Policy Directions Indicate Diverging Growth

Our overall view of the global economy is that while deflationary forces remain a threat, we expect world growth to improve and return to trend levels. At the same time, the global economy is diverging, with some areas accelerating into a higher gear and others still battling recession concerns.

These divergences are derived from different starting points, varying areas of economic strength and, perhaps most notably, how successful various country's policymakers have been in promoting growth. Among the developed markets, Japan is aggressively changing course and the Bank of Japan appears determined to do what is necessary to enact pro-growth policies. The eurozone is still struggling and we believe the European Central Bank has more work to do to combat deflation. The United States is shifting monetary policy as the U.S. economy becomes more sound and begins to climb from 2% annual growth to closer to 3%. From an investment perspective, we believe regions with more successful policy stances should see better equity market results. We also believe these differing policies should support the U.S. dollar.

 

Weekly Top Themes

  1. U.S. employment levels continue to improve. The 214,000 new jobs created in October were slightly less than expected but nevertheless impressive.2 We believe any gain of over 200,000 should be considered strong, and October's results mark the ninth consecutive month in which that level was exceeded, the best run in 15 years.2
  2. U.S. manufacturing is accelerating and remains an important driver of economic growth. The October Institute of Supply Management's manufacturing index climbed to 59.0, returning to its August level, which was the highest since March 2011.3
  3. Last week's mid-term elections may result in policy changes that could affect investors. Specifically, we expect that with Republicans controlling both houses of Congress, it is more likely that we'll see the Keystone Pipeline expansion approved, the medical device tax repealed and additional spending on defense. For more detail, see our recent paper covering the mid-term elections.
  4. Third quarter earnings results should be strong. With over 90% of companies reporting earnings, we expect revenues to be up 4%, earnings to rise 8% and earnings-per-share to advance 10%.
 

The Impediments to a Global Recovery Are Diminishing

Global risk assets have rebounded nicely following the recent correction, a move we believe reflects the strength of the U.S. economy and improving data. The Bank of Japan's recent decision to expand its stimulus measures also reinforced that global policy remains highly accommodative. Falling oil prices are a signal of weaker demand and have contributed to deflationary concerns, however, we also believe that lower energy prices should help support growth in the United States, Europe, China and Japan.

In our view, global growth risks are receding. Certain areas of the global economy are weak, policymakers could make mistakes and geopolitical issues could flare up, but we think these concerns would need to intensify materially to derail the ongoing recovery. As such, we continue to believe equity prices can make gains over the coming months and years, a backdrop that provides support for maintaining overweight positions in equities.

 

1 Source: Morningstar Direct, as of 11/7/14
2 Source: Bureau of Labor Statistics
3 Source: Institute of Supply Management

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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